UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    Form 10-Q

(Mark One)

X        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES 
         EXCHANGE ACT OF 1934

For the quarter ended October 31, 1997 OR

-        TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES 
         EXCHANGE ACT OF 1934

For the transition period from --------- to -----------

                        Commission file number 333-20031


                              NEOMAGIC CORPORATION
             (Exact name of Registrant as specified in its charter)

       DELAWARE                                            77-0344424
[State or other jurisdiction              [I.R.S. Employer Identification No.]
of incorporation or organization]

            3260 Jay Street
        Santa Clara, California                               95054
[Address of principal executive offices]                    [Zip Code]


                                 (408) 988- 7020
               Registrant's telephone number, including area code



Indicate by check mark whether the Registrant (1) has filed all reports 
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 
1934  during the preceding 12 months ( or for such shorter period that the 
registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days.  

                           Yes     X                No

     The number of shares of the Registrant's Common Stock, $.001 par value,
                                 outstanding at
                        November 23, 1997 was 24,172,000

<page 1>

                              NEOMAGIC CORPORATION
                                    FORM 10-Q

                                      INDEX


                                                                          PAGE
PART I.  CONSOLIDATED CONDENSED FINANCIAL INFORMATION

Item 1.  Unaudited Consolidated Condensed Financial Statements:


        Consolidated Condensed Balance Sheets
October 31, 1997 and January 31, 1997                                      3

Consolidated Condensed Statements of Operations
        Three and nine months ended October 31, 1997 and 1996              4

Consolidated Condensed Statements of Cash Flows
        Nine months ended October 31, 1997 and 1996                        5

Notes to Unaudited Consolidated Condensed Financial Statements            6-8

Item 2.  Management's Discussion and Analysis of
        Financial Condition and Results of Operations                     9-22


PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings                                                 23

Item 2.  Changes in Securities                                             23

Item 3.  Defaults Upon Senior Securities                                   23

Item 4.  Submission of Matters to a Vote of Security Holders               23

Item 5.  Other Information                                                 23

Item 6.  Exhibits and Reports on Form 8-K                                  24

Signatures                                                                 25

<page 2>

Part I.  Financial Information
Item I.  Financial Statements
                              NEOMAGIC CORPORATION
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                                 (In thousands)
                                   (Unaudited)

                                              October 31,           January 31, 
                                                 1997                   1997
                                              ----------            ----------
                                     ASSETS

Current assets:
  Cash and cash equivalents                   $ 24,145               $ 13,458
  Restricted cash equivalents                        -                  2,224
  Short-term investments                        38,265                      -
  Accounts receivable, net                      10,159                  2,205
  Inventory                                      4,148                  5,237
  Other current assets                             530                    344
                                              --------               --------
            Total current assets                77,247                 23,468

Property, plant and equipment, net               5,250                  3,395
Other assets                                       704                    601
                                              --------               --------
             Total assets                     $ 83,201               $ 27,464
                                              ========               ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Working capital line of credit              $ 12,477               $ 14,224
  Accounts payable                               7,407                  5,175
  Accrued expenses                               6,088                  1,617
  Current obligations under capital leases         660                  1,054
                                              --------               --------
             Total current liabilities          26,632                 22,070

Long-term obligations under capital leases         739                  1,194
                                              --------               --------
             Total liabilities                  27,371                 23,264

Commitments and contingencies

Stockholders' equity:
  Noncumulative convertible preferred stock          -                     12
  Common stock                                      24                      8
  Additional paid-in-capital                    60,387                 20,471
  Notes receivable from stockholders             (559)                  (822)
  Deferred compensation                        (3,037)                (1,889)
  Accumulated deficit                            (985)               (13,580)
                                              --------               --------
             Total stockholders' equity         55,830                  4,200
                                              --------               --------
             Total liabilities and 
             stockholders' equity             $ 83,201               $ 27,464
                                              ========               ========


     See accompanying notes to consolidated condensed financial statements.

<page 3>
                              NEOMAGIC CORPORATION
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)

                                       Three Months            Nine Months
                                          Ended                   Ended
                                       ------------           ------------
                                       October 31,             October 31,
                                     1997        1996        1997        1996
                                   --------    --------   --------    --------

Net sales                          $ 37,146    $ 15,035   $ 79,997   $ 24,509
 
 Cost of sales                       21,568       9,994     47,261     18,297
                                   --------    --------   --------   ---------
Gross margin                         15,578       5,041     32,736      6,212
 
Operating expenses: 
  Research and development            4,924       2,250     10,729      5,926
  Sales, general and administrative   3,452       1,950      8,111      4,499
  Legal costs                             -           -          -     (1,503)
                                   --------    --------   --------   ---------
          Total operating expenses    8,376       4,200     18,840      8,922
                                   --------    --------   --------   ---------

Income (loss) from operations         7,202         841     13,896     (2,710)

Other income (expense), net:
  Interest income and other             823          42      1,785      1,193
  Interest expense                     (325)       (316)      (863)      (686)
                                   --------    --------   --------   ---------

Income (loss) before income taxes     7,700         567     14,818     (2,203)
                                        
Provision for income taxes            1,155           -      2,223          -
                                   --------    --------   --------   ---------
                                        
Net income (loss)                   $ 6,545       $ 567   $ 12,595  $  (2,203)
                                   ========    ========   ========   =========
                                        
Pro forma net income (loss) per 
share                                  $.25        $.03      $ .50    $  (.10)
                                   ========    ========   ========   =========

Common and common equivalent
shares used in computing pro
forma net income (loss) per share    26,272      22,219     25,387     21,936
                                   ========    ========   ========   =========





     See accompanying notes to consolidated condensed financial statements.

<page 4>

                              NEOMAGIC CORPORATION
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)

 
                                                         Nine Months Ended
                                                      ------------------------
                                                      October 31,   October 31,
                                                         1997          1996
                                                      -----------   ----------

Operating activities:
Net income (loss)                                       $12,595      $ (2,203)
Adjustments to reconcile net income (loss)to net 
cash provided by (used in) operating activities:
  Depreciation and amortization                           1,148           608
  Amortization of deferred compensation                     540           250
  Changes in operating assets and liabilities:                        
    Accounts receivable, net                             (7,954)       (5,140)
    Inventory                                             1,089        (2,981)
    Other current assets                                   (186)         (123)
    Other assets                                           (103)          (37)
    Accounts payable                                      2,232         2,608
    Accrued expenses                                      4,471          (697)
                                                        --------       --------
Net cash provided by (used for) operating activities     13,832        (7,715)
                                                        ========       ========
Investing activities
  Purchases of property, plant and equipment             (3,003)       (1,310)
  Purchases of short term investments                   (47,265)            -
  Maturities of short term investments                    9,000             -
                                                       --------       --------
Net cash used for investing activities                  (41,268)       (1,310)
                                                       ========       ========
Financing activities
  Proceeds from sale leaseback liability                      -         1,337
  Payments on lease obligations                            (849)         (693)
  Proceeds from working capital line of credit           36,695        18,017
  Payments on working capital line of credit            (38,442)       (4,981)
  Net proceeds from issuance of common stock             38,495           308
  Release of amounts held as restricted cash equivalents  2,224             -
                                                       --------      --------
Net cash provided by financing activities                38,123        13,988
                                                       ========      ========
Net increase in cash and cash equivalents                10,687         4,963
Cash and cash equivalents at beginning of period         13,458         6,877
                                                       --------      --------
Cash and cash equivalents at end of period             $ 24,145      $ 11,840
                                                       ========      ========
Supplemental schedules of cash flow information
  Cash paid during the year for:
    Interest                                           $    863      $    686
    Taxes                                              $  2,822              
    Deferred compensation                              $  1,688      $    250

      See accompanying notes to consolidated condensed financial statements

<page 5>

                              NEOMAGIC CORPORATION
         NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


1.  Basis of Presentation:

        The unaudited consolidated condensed financial statements have been 
prepared pursuant to the rules and regulations of the Securities and Exchange 
Commission and include the accounts of NeoMagic Corporation and its wholly 
owned subsidiaries (collectively "NeoMagic" or the "Company").  Certain 
information and footnote disclosures, normally included in financial 
statements prepared in accordance with generally accepted accounting 
principles, have been condensed or omitted pursuant to such rules and 
regulations.  In the opinion of the Company, the financial statements reflect 
all adjustments, consisting only of normal recurring adjustments, necessary 
for a fair presentation of the financial position at October 31, 1997 and 
January 31, 1997, and the operating results for the three and nine months 
ended October 31, 1997 and 1996 and cash flows for the nine months ended 
October 31, 1997 and 1996.  These financial statements and notes should be 
read in conjunction with the Company's audited financial statements and notes 
thereto for the year ended January 31, 1997, included in the Company's 
Registration Statement on Form S-1 as filed with the Securities and Exchange 
Commission on March 13, 1997.

The results of operations for the interim periods are not necessarily 
indicative of the results that may be expected for any other period or for the 
fiscal year which ends January 31, 1998.

The third quarters of fiscal 1998 and 1997 ended on October 26, 1997 and 
October 27, 1996, respectively.  For ease of presentation, the accompanying 
financial statements have been shown as ending on the last day of the calendar 
month.

2.   Inventory:

     Inventory is stated at the lower of cost or market value.  Cost is 
determined by the first-in, first-out method.

Inventory consists of:        October 31,       January 31,
                                 1997              1997
                              -----------------------------    
                                      (in thousands)

Raw materials                 $ 1,805           $   464
Work in process                 1,169               948
Finished goods                  1,174             3,825
                              -------           -------
    Total                     $ 4,148           $ 5,237
                              =======           =======


3.  Net Income (Loss) Per Share and Pro forma Net Income (Loss) Per Share

        Except as noted below, net income (loss) per share is computed using 
the weighted average number of common shares and dilutive common equivalent 
shares outstanding.  Common equivalent shares from convertible preferred stock 
(using the as if-converted method) and from stock options and warrants (using 
the treasury stock method) have been included in the computation when 
dilutive, except that, pursuant to the Securities and Exchange Commission 
Staff Accounting Bulletin, common and common equivalent shares issued by the 
Company at prices below the initial public offering price during the twelve-
month period prior to the initial public offering have been included in the 
calculation as if they were outstanding for all periods presented (using the 
treasury stock method and the initial public offering price) through January 
31, 1997.  Per share information calculated on this basis is as follows (in 
thousands except per share information):

<page 6>
                                     Three Months                Nine Months
                                        Ended                       Ended
                                     ------------                -----------
                                      October 31,                October 31,
                                  1997        1996          1997         1996
                                 ------      ------        ------       ------
Net income (loss) per share       $ .25       $ .03         $.50       $ (.23)
Shares used in computing net
income (loss) per share          26,272      22,219       25,387        9,676


        The pro forma calculation of net income (loss) per share presented in 
the consolidated condensed statements of operations is computed as described 
above and also gives retroactive effect to the conversion of all outstanding 
shares of convertible preferred stock into common stock, even if anti-
dilutive, which took place upon the closing of the Company's initial public 
offering using the as-if-converted method.

4.  Recently Issued Accounting Standard

        In February 1997, the Financial Accounting Standards Board issued 
Statement No. 128, "Earnings per Share," which the Company is required to 
adopt on January 31, 1998.  At that time, the Company will be required to 
change the method currently used to compute earnings per share and to restate 
all prior periods.  Under the new requirements for calculating basic net 
income per share, the dilutive effect of stock options and warrants will be 
excluded.  Basic net income per share computed in accordance with Statement 
No. 128 would have been $.02 greater than the net income per share as reported 
for the three months ended October 31, 1997. Basic net income per share 
computed in accordance with Statement No. 128 would have been $.04 greater 
than the net income per share as reported for the nine month period ended 
October 31, 1997.  The impact of Statement No. 128 on the calculation of fully 
diluted net income per share for the three and nine month periods ended 
October 31, 1997 and 1996 is not expected to be material.  Assuming the 
retroactive conversion of all outstanding shares of convertible preferred 
stock into common stock, there is no impact on the implementation of Statement 
No. 128 to the pro forma net loss per share as reported for the quarter and 
nine month periods ended October 31, 1996.

5.  Working Capital Line of Credit

        The Company maintains a revolving credit agreement ("Credit 
Agreement") with Mitsubishi International Corporation.  The Credit Agreement 
is used to provide 60 day extended credit terms to finance wafer inventory 
purchases. The terms include, but are not limited to, permitted borrowings of 
$18 million and the agreement has an expiration date of January 31, 1998. 

6.  Contingencies  
        In February 1997, Cirrus Logic sent the Company written notice 
asserting that the Company's MagicGraph128TM, MagicGraph128VTM and 
MagicGraph128ZVTM products infringe three United States patents held by Cirrus 
Logic.  Since receiving the notice of alleged infringement, the Company has 
advised Cirrus Logic that the Company does not believe that any of its 
products infringes any claims of the patents.  The Company also has undergone 
a confidential external infringement review and has conducted its own internal 
infringement review, and the Company continues to believe that the Cirrus 
Logic infringement allegations are unfounded.  However, there can be no 
assurances that Cirrus Logic will not file a lawsuit against the Company or 
that the Company would prevail in any such litigation.  Any protracted 
litigation by Cirrus Logic or the success of Cirrus Logic in any such 
litigation could have a material and adverse effect on the Company's financial 
position or results of operations.

In October 1996 the Company was notified by two of its customers that 
they had received a letter from the holder of a United States patent asserting 
that the video/graphics subsystem in such customers' 

<page 7>

notebook PCs, which use 
the Company's MagicGraph128 and MagicGraph128V products, infringe certain 
claims of the patent. The Company has been informed by one of these customers 
that the patentholder has filed suit in Italy, Germany and the United States.
The Company may have certain indemnification obligations to customers with
respect to the infringement of third-party intellectual property rights by 
its products.  There can be no assurance that the Company's 
potential obligations to indemnify such customers will not have a material 
adverse effect on the Company's business, financial condition and results of 
operations.  The Company believes that the Company's MagicGraph128 and 
MagicGraph128V products do not infringe any of the claims of such patent.  The 
Company's belief is based upon a legal opinion from its patent counsel, 
Townsend and Townsend and Crew. In addition to the litigation risks discussed 
below, in Italy, one available preliminary remedy is seizure of infringing
goods.  There can be no assurances that the Company or such customers would
prevail in any patent litigation, or that such customers will continue to
purchase the Company's products under the threat of litigation.

<page 8>

Part I.  Financial Information
Item 2.  Management's Discussion and Analysis of 
Financial Condition and Results of Operations

When used in this discussion, the words "expects," "anticipates" and 
similar expressions are intended to identify forward-looking statements.  Such 
statements, which include statements concerning the timing of availability and 
functionality of products under development, product mix, trends in average 
selling prices, the growth rate of the market for PCs, competition, the 
percentage of export sales and sales to strategic customers, the adoption or 
retention of industry standards, and the availability and cost of products 
from the Company's suppliers, are subject to risks and uncertainties, 
including those set forth below under "Factors that May Affect Results," that 
could cause actual results to differ materially from those projected.  These 
forward-looking statements speak only as of the date hereof.  The Company 
expressly disclaims any obligation or undertaking to release publicly any 
updates or revisions to any forward-looking statements contained herein to 
reflect any changes in the Company's expectations with regard thereto or any 
changes in events, conditions or circumstances on which any such statement is 
based.

Overview

The Company designs, develops and markets multimedia accelerators for 
sale to notebook computer manufacturers.  The Company has developed the first 
commercially available high performance silicon technology that integrates 
large DRAM memory with analog and logic circuitry to provide a high 
performance multimedia solution on a single chip.  The Company's MagicGraph128 
family of pin-compatible multimedia accelerators incorporates a 128-bit memory 
bus.  The Company believes these products enable notebook PC manufacturers to 
deliver state-of-the-art multimedia capabilities while decreasing power 
consumption, size, system design complexity and cost.

        The following information should be read in conjunction with the 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operations" on  pages 19-25 of the Company's Prospectus dated March 13, 1997.

Results of Operations
      
The following table sets forth for the periods indicated certain financial 
data as a percentage of net sales:        

                                       Three Months Ended   Nine Months Ended
                                       ------------------   -----------------
                                           October 31,         October 31,
                                        1997       1996      1997        1996
                                       ------     ------    ------      ------ 

Net sales                              100.0%     100.0%    100.0%      100.0%
Cost of sales                           58.1       66.5      59.1        74.7
                                      ------      ------    ------      ------
Gross margin                            41.9       33.5      40.9        25.3
Operating expenses:
  Research and development              13.2       15.0      13.4        24.2
  Sales, general and administrative      9.3       13.0      10.1        18.3
  Legal costs                              -          -         -        (6.1)
                                      ------      ------    ------      ------
      Total operating expenses          22.5       28.0      23.5        36.4
                                      ------      ------    ------      ------
Income (loss) from operations           19.4        5.5      17.4       (11.1)
Other income (expense), net:
      Interest income and other          2.2         .3       2.2         4.9
      Interest expense                   (.9)      (2.1)     (1.1)       (2.8)
                                      ------      ------     ------      ------
Income (loss) before income taxes       20.7       (3.7)     18.5        (9.0)
Provision for income taxes               3.1          -       2.8           -
                                      ------      ------     ------      ------
Net income (loss)                       17.6       (3.7)     15.7        (9.0)
                                      ======      ======     ======      ======

<page 9>

Net sales

        The Company's net sales to date have been generated from the sale of 
its multimedia accelerators.  The Company's products are used in, and its 
business is dependent on, the personal computer industry with sales primarily 
in Asia, Japan, and the United States.  Net sales were $37.1 million for the 
three months ended October 31, 1997, compared to $15.0 million for the three 
months ended October 31, 1996.  Net sales were $80.0 million for the nine 
months ended October 31, 1997, compared to $24.5 million for the nine months 
ended October 31, 1996. Net sales increased primarily as a result of increased 
market acceptance of the Company's products, introduction by the Company of 
additional products in its MagicGraph128 product family which expanded the 
portion of the market addressed by NeoMagic products, and the Company's 
investment in sales and marketing activities.  The Company expects that the 
percentage of its net sales represented by any one product or type of product 
may change significantly from period to period as new products are introduced 
and existing products reach the end of their product life cycles.  Due to 
competition, the Company's products experience declining unit average selling 
prices over time, which at times can be substantial.

        Export sales accounted for 83.1% and 95.4% of net sales in the three 
months ended October 31, 1997 and 1996, respectively. Export sales accounted 
for 82.8% and 94.8% of net sales in the nine months ended October 31, 1997 and 
1996, respectively.  Approximately 71.7% and 69.8% of export sales for the 
three and nine months ended October 31, 1997, respectively were to affiliates 
of United States customers.  The Company expects that export sales will 
continue to represent a significant portion of net sales, although there can 
be no assurance that export sales as a percentage of net sales will remain at 
current levels.  All sales transactions were denominated in U.S. dollars.

      Five customers accounted for 16.0%, 15.4%, 14.1%, 12.8% and 10.5% of net 
sales for the three months ended October 31, 1997.  Four customers accounted 
for 26.6%, 20.8%, 13.2% and 10.4% of net sales for the three months ended 
October 31, 1996.  Five customers accounted for 16.7%, 15.8%, 14.7%, 12.3% and 
11.0% of net sales for the nine months ended October 31, 1997.  Two customers 
accounted for 35.3% and 18.9% of net sales for the nine months ended October 
31, 1996.  The Company expects a significant portion of its future sales to 
remain concentrated with a limited number of strategic customers.  There can 
be no assurance that the Company will be able to retain its strategic 
customers or that such customers will not cancel or reschedule orders or, in 
the event orders are canceled, that such orders will be replaced by other 
orders.  In addition, sales to any particular customer may fluctuate 
significantly from quarter to quarter.  The occurrence of any such events or 
the loss of a strategic customer could have a material adverse effect on the 
Company's operating results.

Gross Margin

        Gross margin was $15.6 million and $5.0 for the three months ended 
October 31, 1997 and 1996, respectively.  Gross margin increased to 41.9% of 
net sales for the three months ended October 31, 1997 from 33.5% of net sales 
in the three months ended October 31, 1996. Gross margin was $32.7 million and 
$6.2 million for the nine months ended October 31, 1997 and 1996, 
respectively.  Gross margin percentages increased to 40.9% for the nine months 
ended October 31, 1997 from 25.3% in the nine months ended October 31, 1996.  
The increase in gross margin between the three months ended October 31, 1997 
and October 31, 1996 was due in part to a charge of $750,000 for excess 
inventory taken in the third quarter of fiscal 1997.   The gross margin in the 
nine months ended October 31, 1996 was negatively impacted by costs stemming 
from a design error for which the Company recorded a $1.2 million reserve in 
the second quarter and an excess inventory charge of $750,000 taken in the 
third quarter.   The additional increases in gross margin percentage for the 
three and nine month periods ended October 31, 1997 were due primarily to 
lower wafer pricing and improved yields on higher production volumes.  

        In the future, the Company's gross margin percentages may be affected 
by increased competition and related decreases in unit average selling prices 
(particularly with respect to older generation

<page 10>

products), changes in the mix 
of products sold, timing of volume shipments of new products, the availability 
and cost of products from the Company's suppliers, manufacturing yields, and 
foreign currency exchange rate fluctuations. 

Research and Development Expenses

        Research and development expenses were $4.9 million and $2.3 for the 
three months ended      October 31, 1997 and 1996, respectively.  Research and 
development expenses were $10.7 million and $5.9 for the nine months ended  
October 31, 1997 and 1996, respectively.  The Company has made and intends to 
continue to make significant investments in research and development to remain 
competitive by developing new and enhanced products to serve its identified 
markets.  Research and development expenses increased primarily due to 
increased employee related expenses largely related to additional personnel 
and to a lesser extent consulting, engineering and equipment related expenses. 
Research and development expenses are expected to increase in absolute dollars 
in fiscal 1999. 

Sales, General and Administrative Expenses

        Sales, general and administrative expenses were $3.5 and $2.0 million 
for the three months ending October 31, 1997 and 1996, respectively. Sales, 
general and administrative expenses were $8.1 and $4.5 million for the nine 
months ending October 31, 1997 and 1996, respectively.  Sales, general and 
administrative expenses increased as a result of increased employee related 
expenses largely related to additional personnel, increased commissions 
associated with higher sales levels and higher administrative expenses 
associated with being a public company.  The Company anticipates that sales, 
general and administrative expenses will increase in absolute dollars in 
fiscal 1999.

Legal Costs

        The benefit in legal costs of $1.5 million in the nine months ended 
October 31, 1996 was due to the reversal of a reserve balance of previously 
estimated legal costs.    

Other Income (Expense), Net.

        Other income (expense), net increased to $498,000 in the three months 
ended October 31, 1997 from ($274,000) in the three months ended October 31, 
1996.  The $772,000 increase in other income (expense), net was primarily due 
to additional interest income resulting from higher average amounts of cash 
and short-term investments in the three months ended October 31, 1997 compared 
to the same period in 1996, offset partially by higher interest expense from 
higher balances on the working capital line of credit with Mitsubishi 
International Corporation. These higher balances resulted from an increase in 
wafer purchases over the previous period.

Other income (expense), net increased to $922,000 in the nine months 
ended October 31, 1997 from $507,000 in the nine months ended October 31, 
1996. The increase in interest income and (expense) net, of $415,000 in the 
nine month period ending October 31, 1997 as compared to the same period in 
1996 was primarily due to higher interest income caused by larger average 
amounts of cash and cash equivalents and short term investments offset in part 
by additional interest expense from higher balances on the working capital 
line of credit with Mitsubishi International Corporation which resulted from 
an increase in wafer purchases over the previous period and $975,000 of non-
recurring engineering services income in the first nine months of fiscal 1997.  
The non-recurring engineering services performed in fiscal 1997 consisted 
primarily of consulting services and allowing a customer access to certain 
technology, previously developed by the Company for its own use, to construct 
complex logic.  The Company does not expect such engineering services to be 
provided on a regular basis, if at all, in future periods.  Therefore, the 
Company has classified such revenues in other income.  

<page 11>

Income Taxes

The Company's effective tax rate for the three and nine months ended 
October 31, 1997 was 15%, compared to an effective tax rate for the three and 
nine months ended October 31, 1996 of 0%  The difference between the 
Company's effective tax rate and the statutory rate for the three months ended 
October 31, 1997 is primarily due to the utilization of the Company's net 
operating loss carryforwards.

Liquidity and Capital Resources

        The Company's cash, cash equivalents and short term investments 
increased $46.7 million during the first nine months ended October 31, 1997 to 
$62.4 million from $15.7 million at the end of fiscal 1997.  The increase is 
due to net proceeds from the issuance of common stock related to the initial 
public offering in the first quarter of fiscal 1998 and net cash provided from 
operations. Working capital increased $49.2 million to $50.6 million at 
October 31, 1997 from $1.4 million at January 31, 1997.

        During the first nine months ended October 31, 1997 the Company 
generated $13.8 million  of cash and cash equivalents from its operating 
activities, compared to $7.7 million of cash and cash equivalents used in 
operating activities during the nine months ended October 31, 1996.  The 
increase in cash generated from operations is primarily attributable to $12.6 
million in net income for the nine month period ended October 31, 1997 
compared to a net loss of $2.2 million for the corresponding period ended 
October 31, 1996.  The increase also relates to changes in accrued expenses, 
accounts payable and inventory offset by increases in accounts receivable.  

        Net cash used for investing activities for the nine months ended 
October 31, 1997 and 1996 was $41.3 million and $1.3 million, respectively.  
The increase was primarily due to $38.3 million of net purchases of short-term 
investments in the period ended October 31, 1997 and $3.0 million of 
investments in plant, property and equipment.  Continued expansion of the 
Company's business may require higher levels of capital equipment purchases, 
technology investments, foundry investments and other payments to secure 
manufacturing capacity.  The timing and amount of future investments will 
depend primarily on the growth of the Company's future revenues.

        Net cash provided by financing activities for the nine months ended 
October 31, 1997 and 1996 was $38.1 million and $14.0 million, respectively.  
The increase primarily represents the net proceeds from the initial public 
offering of $37.8 in the first quarter of fiscal 1998, and the release of 
amounts previously held as restricted cash offset in part by a decrease in the 
net proceeds related to the working capital line of credit.

        At October 31, 1997 the Company's principal sources of liquidity 
included cash and cash equivalents and short-term investments of $62.4 million 
and borrowings from Mitsubishi International Corporation, under a working 
capital revolving credit agreement.  The Company believes these available 
funds and anticipated funds from operations will satisfy the Company's 
projected working capital, and capital expenditure requirements through the 
next 12 months, although the Company could be required, or could elect, to 
seek to raise additional capital during such period.  Investments will 
continue in product development in new and existing areas of technology.  Cash 
may also be used to acquire technology through purchases and strategic 
acquisitions.  The Company's future capital requirements will depend on many 
factors, including the rate of net sales growth, the timing and extent of 
spending to support research and development programs, expansion of sales and 
marketing, the timing of introductions of new products and enhancements to 
existing products, and market acceptance of the Company's products.  The 
Company expects that it may need to raise additional equity or debt financing 
in the future.  There can be no assurance that additional equity or debt 
financing, if required, will be available on acceptable terms or at all.  

<page 12>

Impact of Currency Exchange Rates

        Because the Company currently purchases wafers under purchase 
contracts denominated in yen, significant appreciation in the value of yen 
relative to the value of the U.S. dollar would make the wafers relatively more 
expensive to the Company, which could have a material adverse effect on the 
Company's business, financial condition and results of operation.  The Company 
from time to time enters into foreign currency forward contracts to minimize 
foreign currency fluctuation exposures related to these firm purchase 
commitments.  The Company does not use derivative financial instruments for 
speculative or trading purposes.  The Company's accounting policies for these 
instruments are based on the Company's designation of such instruments as 
hedging transactions.  The criteria the Company uses for designating an 
instrument as a hedge include its effectiveness in risk reduction and one-to-
one matching of derivative instruments to underlying transactions.  
Notwithstanding the measures the Company has adopted, due to the 
unpredictability and volatility of currency exchanges rates and currency 
controls, there can be no assurance that the Company will not experience 
currency losses in the future, not can the Company predict the effect of 
exchange rate fluctuations upon future operating results.

Factors that May Affect Results

Fluctuations in Quarterly Operating Results

        NeoMagic's quarterly and annual results of operations are affected by 
a variety of factors that could materially adversely affect net sales, gross 
margin and income from operations.  These factors include, among others, 
demand for the Company's products; changes in product or customer mix, (i.e., 
the portion of the Company's revenues represented by the Company's various 
products and customers); fluctuations in manufacturing yields; incorrect 
forecasting of future revenues; availability and cost of manufacturing 
capacity; unanticipated delays or problems in the introduction or performance 
of the Company's next generation of products; the Company's ability to 
introduce new products in accordance with OEM design requirements and design 
cycles; market acceptance of the products of the Company's customers; changes 
in the timing of product orders due to unexpected delays in the introduction 
of products of the Company's customers or due to the life cycles of such 
customers' products ending earlier than anticipated; new product announcements 
or product introductions by NeoMagic's competitors; competitive pressures 
resulting in lower selling prices; the volume of orders that are received and 
can be fulfilled in a quarter; the rescheduling or cancellation of orders by 
customers which cannot be replaced with orders from other customers; supply 
constraints for the other components incorporated into its customers' notebook 
PC products; foreign exchange rate fluctuations; the unanticipated loss of any 
strategic relationship; seasonality associated with the tendency of PC sales 
to increase in the second half of each calendar year; the level of 
expenditures for research and development and sales, general and 
administrative functions of the Company; costs associated with future 
litigation; and costs associated with protecting the Company's intellectual 
property.  Any one or more of these factors could result in the Company 
failing to achieve its expectations as to future revenues.  The Company may be 
unable to adjust spending sufficiently in a timely manner to compensate for 
any unexpected sales shortfall, which could materially adversely affect 
quarterly operating results.  Accordingly, the Company believes that period-
to-period comparisons of its operating results should not be relied upon as an 
indication of future performance.  In addition, the results of any quarterly 
period are not indicative of results to be expected for a full fiscal year.  
In certain future quarters, the Company's operating results may be below the 
expectations of public market analysts or investors.  In such event, the 
market price of the Common Stock would be materially adversely affected.

Risks Associated with Dependence on the Notebook PC Market

        The Company's products are used only in notebook PCs.  The notebook PC 
market is characterized by rapidly changing technology, evolving industry 
standards, frequent new product introductions and significant price 
competition, resulting in short product life cycles and regular reductions of 
average selling prices over the life of a specific product.  Although the 
notebook PC market has grown 

<page 13>

substantially in recent years, there is no 
assurance that such growth will continue.  A reduction in sales of notebook 
PCs, or a reduction in the growth rate of such sales, would likely reduce 
demand for the Company's products.  Moreover, such changes in demand could be 
large and sudden.  Since PC manufacturers often build inventories during 
periods of anticipated growth, they may be left with excess inventories if 
growth slows or if they have incorrectly forecast product transitions.  In 
such cases, the PC manufacturers may abruptly suspend substantially all 
purchases of additional inventory from suppliers such as the Company until the 
excess inventory has been absorbed.  Any reduction in the demand for notebook 
PCs in general, or for a particular product that incorporates the Company's 
multimedia accelerators, could have a material adverse impact on the Company's 
business, financial condition and results of operations.

        The Company's ability to compete in the future will depend on its 
ability to identify and ensure compliance with evolving industry standards.  
Unanticipated changes in industry standards could render the Company's 
products incompatible with products developed by major hardware manufacturers 
and software developers, including Intel Corporation and Microsoft 
Corporation.  The Company could be required, as a result, to invest 
significant time and effort to redesign it's products to ensure compliance 
with relevant standards.  If the Company's products are not in compliance with 
prevailing industry standards for a significant period of time, the Company 
could miss opportunities to achieve crucial design wins, which could result in 
a material adverse change in the Company's business, financial condition and 
results of operations.  In addition, the Company's products are designed to 
afford the notebook PC manufacturer significant advantages with respect to 
product performance, power consumption and size.  To the extent that future 
developments in other notebook PC components or subassemblies incorporate one 
or more of the advantages offered by the Company's products, the market demand 
for the Company's products may be negatively impacted, which could result in a 
material adverse change in the Company's business, financial condition and 
results of operations.

Product Concentration; Risks Associated with Multimedia Products

        The Company's revenues are entirely dependent on the market for 
multimedia accelerators for notebook PCs, and on the Company's ability to 
compete in that market.  Since the Company has no other product line, the 
Company's revenues and results of operations would be materially adversely 
affected if for any reason it were unsuccessful in selling multimedia 
accelerators.  The notebook PC market frequently undergoes transitions in 
which products rapidly incorporate new features and performance standards on 
an industry-wide basis.  If the Company's products are unable at the beginning 
of each such transition to support the new feature sets or performance levels 
being required by notebook PC manufacturers, the Company would likely lose 
design wins and moreover, not have the opportunity to compete for new design 
wins until it was able to incorporate changes resulting from market 
transitions or to take advantage of future product transitions.  Thus, a 
failure to develop products with required feature sets or performance 
standards or a delay as short as a few months in bringing a new product to 
market could significantly reduce the Company's net sales for a substantial 
period, which would have a material adverse effect on the Company's business, 
financial condition and results of operations.

        The notebook PC multimedia market is characterized by extreme price 
competition.  Leading-edge products may command higher average selling prices 
but prices decline throughout the product life cycle as comparable and more 
advanced products are introduced into the market.  As a result, the Company's 
ability to maintain average selling prices and gross margins depends 
substantially on its ability to continue introducing new products.  Its 
ability to maintain gross margins is also dependent, but to a lesser extent, 
upon its ability to reduce product costs throughout a product life cycle by 
instituting cost reduction design changes and yield improvements, persuading 
customers to adopt cost-reduced versions of its products and successfully 
managing its manufacturing and subcontract relationships. The failure of the 
Company to continue designing and introducing advanced products in a timely 
manner or to continue reducing product costs would have a material adverse 
effect on the Company's net sales, gross margins and results of operations.

<page 14>

Customer Concentration

        The Company's sales are concentrated within a limited customer base.  
The Company expects that a small number of customers will continue to account 
for a substantial portion of its net sales for the foreseeable future.  
Furthermore, all of the Company's sales are made on the basis of purchase 
orders rather than pursuant to long-term agreements.  As a result, the 
Company's business, financial condition and results of operations could be 
materially adversely affected by the decision of a single customer to cease 
using the Company's products or by a decline in the number of notebook PCs 
sold by a single customer or by a small number of customers.

Effects of Changes in DRAM Pricing

        The Company's MagicGraph128 products feature large DRAM memory 
integrated with analog and logic circuitry on a single chip, while its 
competitors provide only the graphics/video analog and logic circuitry on a 
separate chip to be used in conjunction with DRAMs supplied by others.  The 
prices of the Company's products reflect  many factors, including the prices 
of DRAM chips.  As a result, the Company's business, financial condition and 
results of operations may be materially and adversely affected by 
unanticipated changes in the price of DRAMs.  Such changes are typically 
sudden and dramatic and can extend over a significant period of time.  For 
example, the average price of 4-Mbit DRAMs declined by more than 43%  in the 
first nine months of 1997, and this decline affected the average selling 
prices of the Company's products.  A significant reduction in the price of 
DRAMs could cause the Company's products to be less competitively priced, 
potentially affecting ongoing product pricing as well as resulting in the loss 
of design wins for new notebook PCs.  In this circumstance, competitors 
without embedded DRAM could be potentially benefited by DRAM price reductions, 
and the Company could be forced to respond to pricing pressures precipitated 
by changes in the DRAM market by reducing the average selling prices of its 
products to current and prospective system manufacturer customers.  Because 
the Company's product costs cannot be adjusted as rapidly as changes in 
average selling prices to system manufacturers, the Company's net sales and 
gross margin would be materially and adversely impacted.

Dependence on Manufacturing Relationships
        
        The Company's products require wafers manufactured with state-of-the-
art fabrication equipment and techniques.  The Company's products are 
primarily manufactured by Mitsubishi Electric Corporation ("Mitsubishi 
Electric") in Japan.   Mitsubishi Electric is currently producing six and 
eight-inch wafers for the Company.   The Company has also begun manufacturing 
eight-inch wafers with Toshiba Corporation ("Toshiba") in Japan. A significant 
portion of the Company's wafer requirements will not be met by Toshiba before 
calendar 1998.  Each of these manufacturing relationships are covered under 
the terms of a five-year wafer supply agreement.  The Company expects that, 
for the foreseeable future, some of its products will be single source 
manufactured.  Because the lead time needed to establish a strategic 
relationship with a new DRAM partner is at least 12 months and the estimated 
time for a foundry to switch to a new product line is four to nine months, 
there is no readily available alternative source of supply for any specific 
product.  A manufacturing disruption experienced by either of the Company's 
manufacturing partners would impact the production of the Company's business, 
financial condition and result of operations.  Furthermore, in the event that 
the transition to the next generation of manufacturing technologies at 
Mitsubishi Electric or Toshiba is unsuccessful  the Company's business, 
financial condition and results of operations would be materially and 
adversely affected.

        There are many other risks associated with the Company's dependence 
upon third party manufacturers, including:  reduced control over delivery 
schedules, quality assurance, manufacturing yields and cost; the potential 
lack of adequate capacity during periods of excess demand; limited warranties 
on wafers supplied to the Company; and potential misappropriation of NeoMagic 
intellectual 

<page 15>

property.  The Company is dependent on Mitsubishi Electric and 
Toshiba to produce wafers of acceptable quality and with acceptable 
manufacturing yields, to deliver those wafers to the Company and its 
independent assembly and testing subcontractors on a timely basis and to 
allocate to the Company a portion of their manufacturing capacity sufficient 
to meet the Company's needs.  On occasion, the Company has experienced some of 
these situations.  Although the Company's products are designed using the 
process design rules of the particular manufacturer, there can be no assurance 
that either Mitsubishi Electric or Toshiba will be able to achieve or maintain 
acceptable yields or deliver sufficient quantities of wafers on a timely basis 
or at an acceptable cost.  Additionally, there can be no assurance that either 
Mitsubishi Electric or Toshiba will continue to devote resources to the 
production of the Company's products or continue to advance the process design 
technologies on which the manufacturing of the Company's products are based.  
Any such difficulties would have a material adverse effect on the Company's 
business, financial condition and results of operations.

        The Company's products are assembled and tested by third party 
subcontractors.  The Company does not have long term agreements with any of 
these subcontractors.  Such assembly and testing is conducted on a purchase 
order basis.  As a result of its reliance on third party subcontractors to 
assemble and test its products, the Company cannot directly control product 
delivery schedules, which could lead to product shortages or quality assurance 
problems that could increase the costs of manufacturing or assembly of the 
Company's products.  Due to the amount of time normally required to qualify 
assembly and test subcontractors, product shipments could be delayed 
significantly if the Company is required to find alternative subcontractors.  
Any problems associated with the delivery, quality or cost of the assembly and 
test of the Company's products could have a material adverse effect on the 
Company's business, financial condition and results of operations.

Inventory Risk

        Under its wafer supply agreements with Mitsubishi Electric and 
Toshiba, the Company is obligated to provide rolling 12-month forecasts of 
anticipated purchases and to place binding purchase orders four months prior 
to shipment.  If the Company cancels a purchase order, it must pay 
cancellation penalties based on the status of work in process or the proximity 
of the cancellation to the delivery date.  Forecasts of monthly purchases may 
not increase or decrease by more than a certain percentage from the previous 
month's forecast without the manufacturer's consent.  Thus, the Company must 
make forecasts and place purchase orders for wafers long before it receives 
purchase orders from its own customers.  This limits the Company's ability to 
react to fluctuations in demand for its products, which can be unexpected and 
dramatic, and from time-to-time will cause the Company to have an excess or a 
shortage of wafers for a particular product.  As a result of the long lead 
time for manufacturing wafers, semiconductor companies such as the Company 
from time-to-time must take charges for excess inventory.  For example, the 
Company booked charges totaling $1.5 million for excess inventory in fiscal 
1997.  Significant write-offs of excess inventory could materially adversely 
affect the Company's financial condition and results of operations.  
Conversely, failure to order sufficient wafers would cause the Company to miss 
revenue opportunities and, if significant, could impact sales by the Company's 
customers, which could adversely affect the Company's customer relationships 
and thereby materially adversely affect the Company's business, financial 
condition and results of operations.

Manufacturing Yields

        The fabrication of semiconductors is a complex and precise process.  
Because NeoMagic's products feature the integration of large DRAM memory with 
analog and logic circuitry on a single chip, a manufacturer must obtain 
acceptable yields of both the memory and logic portions of such products, 
compounding the complexity of the manufacturing process.  As a result, the 
Company may face greater manufacturing challenges than its competitors.  
Minute levels of contaminants in the manufacturing environment, defects in 
masks used to print circuits on a wafer, difficulties in the fabrication 
process or other factors can cause a substantial percentage of wafers to be 
rejected or a significant number of die on 

<page 16>

each wafer to be nonfunctional.  
Many of these problems are difficult to diagnose and time consuming or 
expensive to remedy.  As a result, semiconductor companies often experience 
problems in achieving acceptable wafer manufacturing yields, which are 
represented by the number of good die as a proportion of the total number of 
die on any particular wafer.  The Company purchases wafers, not die, and pays 
an agreed price for wafers meeting certain acceptance criteria.  Accordingly, 
the Company bears the risk of final yield of good die.  Poor yields would 
materially adversely affect the Company's net sales, gross margins and results 
of operations.

        Semiconductor manufacturing yields are a function both of product 
design, which is developed largely by the Company, and process technology, 
which is typically proprietary to the manufacturer.  Since low yields may 
result from either design or process technology failures, yield problems may 
not be effectively determined or resolved until an actual product exists that 
can be analyzed and tested to identify process sensitivities relating to the 
design rules that are used.  As a result, yield problems may not be identified 
until well into the production process, and resolution of yield problems would 
require cooperation by and communication between the Company and the 
manufacturer.  For example, a design error that resulted in lower than 
expected yields of finished products caused the Company to take a $1.2 million 
charge for the three months ended July 31, 1996.  This risk is compounded by 
the offshore location of the Company's manufacturers, increasing the effort 
and time required to identify, communicate and resolve manufacturing yield 
problems.  As the Company's relationships with Toshiba and any additional 
manufacturing partners develop, yields could be adversely affected due to 
difficulties associated with adopting the Company's technology and product 
design to the proprietary process technology and design rules of each 
manufacturer.  Because of the Company's limited access to wafer fabrication 
capacity from its manufacturers, any decrease in manufacturing yields could 
result in an increase in the Company's per unit costs and force the Company to 
allocate its available product supply among its customers, thus potentially 
adversely impacting customer relationships as well as revenues and gross 
margin.  There can be no assurance that the Company's manufacturers will 
achieve or maintain acceptable manufacturing yields in the future.  The 
inability of the Company to achieve planned yields from its manufacturers 
could have a material adverse effect on the Company's business, financial 
condition and results of operations.  Furthermore, the Company also faces the 
risk of product recalls resulting from design or manufacturing defects which 
are not discovered during the manufacturing and testing process.  In the event 
of a significant number of product returns, the Company's net sales and gross 
margin could be materially adversely affected.

Dependence on New Product Development; Rapid Technological Change

        The Company's business, financial condition and results of operations 
will depend to a significant extent on its ability to maintain its position in 
the market for multimedia accelerator products that integrate large DRAM with 
analog and logic circuitry on a single chip.  As a result,  the Company 
believes that significant expenditures for research and development will 
continue to be required in the future.   The notebook PC market for which the 
Company's initial products are designed is intensely competitive and is 
characterized by rapidly changing technology, evolving industry standards and 
declining average selling prices.  Notebook PC manufacturers demand products 
incorporating rich features and functionality in order to achieve product 
differentiation.  The Company must anticipate the features and functionality 
that the consumer of notebook PCs will demand, incorporate those features and 
functionality into products that meet the exacting design requirements of the 
notebook PC manufacturers, price its products competitively, and introduce the 
products to the market within the limited window of market demand.  The 
success of new product introductions is dependent on several factors, 
including proper new product definition, timely completion and introduction of 
new product designs, the ability of Mitsubishi Electric, Toshiba and any 
additional strategic manufacturing partners to effectively design and 
implement the manufacture of new products, quality of new products, 
differentiation of new products from those of the Company's competitors and 
market acceptance of NeoMagic's and its customers' products.  There can be no 
assurance that the products the Company expects to introduce will incorporate 
the features and functionality demanded by system manufacturers and consumers 
of notebook PCs will be 

<page 17>

successfully developed, or will be introduced within 
the appropriate window of market demand.  The failure of the Company to 
successfully introduce new products and achieve market acceptance for such 
products would have a material adverse effect on the Company's business, 
financial condition and results of operations.

        The integration of large DRAM memory with analog and logic circuitry 
on a single chip is highly complex and is critical to the Company's success.  
Because of the complexity of its products, however, NeoMagic has experienced 
delays from time to time in completing development and introduction of new 
products.  In the event that there are delays in the completion of development 
of future products, including the products currently expected to be announced 
over the next year, the Company's business, financial condition and results of 
operations would be materially adversely affected.  Although the development 
cycles for the memory and logic portions of the Company's products have been 
relatively synchronized to date, there can be no assurance that this 
synchronization will continue in the future.  In addition, there can be no 
assurance that fundamental advances in either the memory or logic components 
of the Company's products will not significantly increase the complexity 
inherent in the design and manufacture of MagicGraph128 products, rendering 
the Company's product technologically infeasible or uncompetitive.  The 
multiple chip solutions offered by the Company's competitors are less complex 
to design and manufacture than the Company's integrated MagicGraph128 
products.  As a result, these competitive solutions may be less expensive, 
particularly during periods of depressed DRAM prices.  The time required for 
competitors to develop and introduce competing products may be shorter and 
manufacturing yields may be better than those experienced by the Company.

        As the markets for the Company's products continue to develop and 
competition increases, NeoMagic anticipates that product life cycles will 
shorten and average selling prices will decline.  In particular, average 
selling prices and, in some cases, gross margin for each of the Company's 
products will decline as such products mature.  Thus, the Company will need to 
introduce new products to maintain average selling prices.  There can be no 
assurance that the Company will successfully identify new product 
opportunities and develop and bring new products to market in a timely manner, 
that products or technologies developed by others will not render NeoMagic's 
products or technologies obsolete or uncompetitive, or that the  Company's 
products will be selected for design into the products of its targeted 
customers.  The failure of the Company's new product development efforts would 
have a material adverse effect on NeoMagic's business, financial condition and 
results of operations.

Competition

        The market for multimedia accelerators for notebook PCs in which the 
Company competes is intensely competitive and is characterized by rapid 
technological change, evolving industry standards and declining average 
selling prices.  NeoMagic believes that the principal factors of competition 
in this market are performance, price, features, power consumption, size and 
software support.  The ability of the Company to compete successfully in the 
rapidly evolving notebook PC market depends on a number of factors, including 
success in designing and subcontracting the manufacture of new products that 
implement new technologies, product quality, reliability, price, the 
efficiency of production, design wins for NeoMagic's integrated circuits, ramp 
up of production of the Company's products for particular system 
manufacturers, end-user acceptance of the system manufacturers' products, 
market acceptance of competitors' products and general economic conditions.  
There can be no assurance that the Company will be able to compete 
successfully in the future.

        NeoMagic competes with major domestic and international companies, 
most of which have substantially greater financial and other resources than 
the Company with which to pursue engineering, manufacturing, marketing and 
distribution of their products.  The Company's principal competitors include 
Chips & Technologies, Inc. ("Chips & Technologies"), Cirrus Logic, Inc. 
("Cirrus Logic"), S3 Incorporated ("S3"), and Trident Microsystems, Inc. 
("Trident").  On July 28 1997, Intel Corporation announced its intention to 
purchase Chips and Technologies.  NeoMagic may also face increased 

<page 18>

competition 
from new entrants into the notebook PC multimedia accelerator market including 
companies currently selling products designed for desktop PCs.  Furthermore, 
the Company expects that many of its competitors will seek to develop and 
introduce products that integrate large DRAM with analog and logic circuitry 
on a single chip.  For example, Chips & Technologies, Trident and S3 have 
publicly disclosed that they have or will begin sampling an integrated 
multimedia accelerator solution for the notebook PC market that would directly 
compete with the Company's products.  Potential competition also could come 
from manufacturers that integrate a microprocessor with a multimedia 
controller.  Although Intel has not announced any such product independently, 
its relationship with Chips and Technologies could yield some type of 
commercial product in the future.  The successful commercial introduction of 
such a product that eliminates the need for a separate multimedia accelerator 
in notebook PCs could have a material adverse effect on the Company's 
business, financial condition and results of operations.
        
        Some of the Company's current and potential competitors operate their 
own manufacturing facilities.  Since the Company does not operate its own 
manufacturing facility and must make binding commitments to purchase products, 
it may not be able to reduce its costs and cycle time or adjust its production 
to meet demand as rapidly as companies that operate their own facilities, 
which could have a material adverse effect on its business, financial 
condition and results of operations. In addition, the prices of the Company's 
products reflect many factors, including the prices of DRAM chips and non-
integrated graphics chips.  Therefore, in some cases, the Company's products 
may be more expensive than competitive multiple chip solutions.  The Company 
in the past has lost and in the future may lose design wins due to this price 
difference.  Furthermore, a significant reduction in the price of DRAMs could 
cause the Company's products to be less competitively priced, potentially 
affecting ongoing product pricing as well as resulting in the loss of design 
wins for new notebook PCs.  Uncompetitive pricing and loss of design wins 
could have a material and adverse effect on the Company's business, financial 
condition, and results of operations.

Uncertainty Regarding Patents and Protection of Proprietary Rights

        The Company relies in part on patents to protect its intellectual 
property.  In the United States, the Company has been issued four patents, 
each covering certain aspects of the design and architecture of the Company's 
multimedia accelerators.  In addition, the Company has patent applications 
pending in the United States Patent and Trademark Office (the "PTO").  There 
can be no assurance that the Company's pending patent applications or any 
future applications will be approved, or that any issued patents will provide 
the Company with competitive advantages or will not be challenged by third 
parties, or that the patents of others will not have an adverse effect on the 
Company's ability to do business.  Furthermore, there can be no assurance that 
others will not independently develop similar products, duplicate the 
Company's products or design around any patents that may be issued to the 
Company.

        The Company also relies on a combination of mask work protection, 
trademarks, copyrights, trade secret laws, employee and third-party 
nondisclosure agreements and licensing arrangements to protect its 
intellectual property.  Despite these efforts, there can be no assurance that 
others will not independently develop substantially equivalent intellectual 
property or otherwise gain access to the Company's trade secrets or 
intellectual property, or disclose such intellectual property or trade 
secrets, or that the Company can meaningfully protect its intellectual 
property.  A failure by the Company to meaningfully protect its intellectual 
property could have a material adverse effect on the Company's business, 
financial condition and results of operations.

        In October 1996 the Company was notified by two of its customers that 
they had received a letter from the holder of a United States patent asserting 
that the video/graphics subsystem in such customers' notebook PCs, which use 
the Company's MagicGraph128 and MagicGraph128V products, infringe certain 
claims of the patent.  The Company has been informed by one of these
customers that the patentholder has filed suit in Italy, Germany and the
United States.  The Company may have certain indemnification obligations to 
customers with respect to the infringement of third-party intellectual 
property rights by its products.  There can be no assurance that the Company's 
potential obligations to indemnify such customers will not have a material

<page 19>
 
adverse effect on the Company's business, financial condition and results of 
operations.  The Company believes that the Company's MagicGraph128 and 
MagicGraph128V products do not infringe any of the claims of such patent.  The 
Company's belief is based upon a legal opinion from its patent counsel, 
Townsend and Townsend and Crew LLP.  In addition to the litigation risks
discussed below, in Italy, one available preliminary remedy is seizure of 
infringing goods.  There can be no assurances that the 
Company or such customers would prevail in any patent litigation, or that
such customers will continue to purchase the Company's products under the
threat of litigation.

        As a general matter, the semiconductor industry is characterized by 
substantial litigation regarding patent and other intellectual property 
rights.  The Company in the past has been, and in the future may be, notified 
that it may be infringing the intellectual property rights of third parties.  
In November 1994, Cirrus Logic filed suit against the Company and certain of 
its employees claiming, among other things, breach of fiduciary duty, breach 
of and interference with contract and misappropriation of trade secrets.  The 
Company and Cirrus Logic settled the lawsuit in June 1996, but the Company 
incurred an aggregate of $703,000 in expenses in connection with such 
litigation during fiscal 1995 and fiscal 1996.  This settlement did not 
involve cash payments but did include a non-solicitation provision and certain 
contingent cross-licensing provisions.  In February 1997, Cirrus Logic sent 
the Company written notice asserting that the Company's MagicGraph128TM, 
MagicGraph128VTM and MagicGraph128ZVTM products infringe three United States 
patents held by Cirrus Logic.  Since receiving the notice of alleged 
infringement, the Company has advised Cirrus Logic that the Company does not 
believe that any of its products infringes any claims of the patents.  The 
Company also has undergone a confidential external infringement review and has 
conducted its own internal infringement review, and the Company continues to 
believe that the Cirrus Logic infringement allegations are unfounded.  
However, there can be no assurances that Cirrus Logic will not file a lawsuit 
against the Company or that the Company would prevail in any such litigation.  
Any protracted litigation by Cirrus Logic or the success of Cirrus Logic in 
any such litigation could have a material and adverse effect on the Company's 
financial position or results of operations.

        Any patent litigation, whether or not determined in the Company's 
favor or settled by the Company, would at a minimum be costly and could divert 
the efforts and attention of the Company's management and technical personnel 
from productive tasks, which could have a material adverse effect on the 
Company's business, financial condition and results of operations.  There can 
be no assurance that current or future infringement claims by third parties or 
claims for indemnification by other customers or end users of the Company's 
products resulting from infringement claims will not be asserted in the future 
or that such assertions, if proven to be true, will not materially adversely 
affect the Company's business, financial condition and results of operations.  
In the event of any adverse ruling in any such matter, the Company could be 
required to pay substantial damages, which could include treble damages, cease 
the manufacturing, use and sale of infringing products, discontinue the use of 
certain processes or to obtain a license under the intellectual property 
rights of the third party claiming infringement.  There can be no assurance, 
however, that a license would be available on reasonable terms or at all  Any 
limitations on the Company's ability to market its products, or delays and 
costs associated with redesigning its products or payments of license fees to 
third parties, or any failure by the Company to develop or license a 
substitute technology on commercially reasonable terms could have a material 
adverse effect on the Company's business, financial condition and results of 
operations.

Dependence on International Sales and Suppliers

        Export sales are a critical part of the Company's business.  Sales to 
customers located outside the United States (including sales to foreign 
operations of customers headquartered in the United States and foreign system 
manufacturers that sell to United States-based OEMs) accounted for 82.8% and 
94.8% of the Company's net sales for the first nine months of  fiscal 1996 and 
fiscal 1997, respectively.  The Company expects that net sales derived from 
international sales will continue to represent a significant portion of its 
total net sales.  Some of the Company's international sales are supported by 
letters of credit 

<page 20>

issued by its customers.  Because the Company's 
international sales have to date been denominated in United States dollars, 
increases in the value of the United States dollar could increase the price in 
local currencies of the Company's products in foreign markets and make the 
Company's products relatively more expensive than competitors products that 
are denominated in local currencies.  All of the Company's wafers are and for 
the foreseeable future will be produced by foreign manufacturers.  In 
addition, many of the assembly and test services used by the Company are 
procured from international sources.  Under the Company's wafer supply 
agreements with Mitsubishi Electric and Toshiba, products are priced in 
Japanese yen.  As a result, the Company's cost of goods sold are subject to 
fluctuations in the yen-dollar exchange rates.  The Company has in the past 
hedged its exposure to fluctuations in such foreign currency exchange rate by 
purchasing foreign exchange contracts and will continue to do so in the 
future.  However, there can be no assurance that such hedging will be 
adequate.  Significant wafer or assembly and test service price increases, 
fluctuations in currency exchange rates or the Company's hedging against 
currency exchange rate fluctuations could have a material adverse effect on 
the Company's business, financial condition and results of operations. 

        International sales and manufacturing operations are subject to a 
variety of risks, including fluctuations in currency exchange rates, tariffs, 
import restrictions and other trade barriers, unexpected changes in regulatory 
requirements, longer accounts receivable payment cycles, potentially adverse 
tax consequences and export license requirements.  In addition, the Company is 
subject to the risks inherent in conducting business internationally including 
foreign government regulation, political and economic instability, and 
unexpected changes in diplomatic and trade relationships.  Moreover, the laws 
of certain foreign countries in which the Company's products may be developed, 
manufactured or sold, including various countries in Asia, may not protect the 
Company's intellectual property rights to the same extent as do the laws of 
the United States, thus increasing the possibility of piracy of the Company's 
products.  There can be no assurance that one or more of these risks will not 
have a material adverse effect on the Company's business, financial condition 
and results of operations.

Need for Additional Capital

        The Company requires substantial working capital to fund its business, 
particularly to finance inventories and accounts receivable and for capital 
expenditures.  The Company believes that its existing capital resources, will 
be sufficient to meet the Company's capital requirements through the next 12 
months, although the Company could be required, or could elect, to seek to 
raise additional capital during such period.  The Company's future capital 
requirements will depend on many factors, including the rate of net sales 
growth, the timing and extent of spending to support research and development 
programs and expansion of sales and marketing, the timing of introductions of 
new products and enhancements to existing products, and market acceptance of 
the Company's products.  The Company may raise additional equity or debt 
financing in the future.  There can be no assurance that additional equity or 
debt financing, if required, will be available on acceptable terms or at all.

Management of Expanded Operations
        
        The Company has experienced, and may continue to experience, periods 
of rapid growth and expansion, which have placed, and could continue to place, 
a significant strain on the Company's limited personnel and other resources.  
To manage these expanded operations effectively, the Company will be required 
to continue to improve its operational, financial and management systems.  
Given its relatively early stage of development, the Company is dependent upon 
its ability to successfully hire, train, motivate and manage its employees, 
especially its management and development personnel.  If the Company's 
management is unable to manage its expanded operations effectively, the 
Company's business, financial condition and results of operations could be 
materially adversely affected.

<page 21>

Dependence on Qualified Personnel

        The Company's future success depends in part on the continued service 
of its key engineering, sales, marketing, manufacturing, finance and executive 
personnel, and its ability to identify, hire and retain additional personnel.  
There is intense competition for qualified personnel in the semiconductor 
industry, and there can be no assurance that the Company will be able to 
continue to attract and train qualified personnel necessary for the 
development of its business.  The Company's anticipated growth is expected to 
place increased demands on the Company's resources and will likely require the 
addition of new management personnel and the development of additional 
expertise by existing management personnel.  Loss of the services of, or 
failure to recruit in a timely manner, key technical and management personnel 
could be significantly detrimental to the Company's product development 
programs or otherwise have a material adverse effect on the Company's 
business, financial condition and results of operations.

Volatility of Stock Price

The market price of the shares of Common Stock, like that of the common 
stock of many other semiconductor companies, has been and is likely to be 
highly volatile, and the market has from time to time experienced significant 
price and volume fluctuations that are unrelated to the operating performance 
of particular companies.  The market price of the Common Stock could be 
subject to significant fluctuations in response to quarter-to-quarter 
variations in the Company's anticipated or actual operating results, 
announcements of new products, technological innovations or setbacks by the 
Company or its competitors, conditions in the semiconductor and PC industries, 
unanticipated shifts in the Notebook PC market or industry standards, loss of 
customers, changes in DRAM pricing, the commencement of, developments in or 
outcome of litigation, changes in or the failure by the Company to meet 
estimates of the Company's performance by securities analysts, market 
conditions for high technology stocks in general, and other events or factors. 
 
<page 22>

Part II.  Other Information

Item 1.        Legal Proceedings

               None.

Item 2.        Changes in Securities 

        The Company completed its initial public offering pursuant to a 
Registration Statement on Form S-1 in March 1997 and issued 3,000,000 
shares of its Common Stock to the public at a price of $12.00 per share.  
The managing underwriters for the initial public offering were Morgan 
Stanley & Co., Montgomery Securities and Robertson, Stephens & Company.  
The offering has been terminated and all the shares were sold.  The 
Company received approximately $32.4 million of cash from the initial 
public offering, net of underwriting discounts, commissions, and other 
offering costs (approximately $1.1 million).  
The Company also received $1.5 million in proceeds from Direct Sales of 
125,000 shares of the Company's stock at a price of $12 per share.  In 
April 1997 the underwriters exercised their over-allotment option and 
purchased an additional 450,000 shares (of which 100,000 shares were 
sold by selling shareholders) at $12.00 per share with net proceeds to 
the Company of approximately $ 3.9 million (net proceeds to the selling 
shareholders was approximately $1.2 million).  The principal purpose of 
this offering was to obtain additional capital, create a public market 
for the Company's Common Stock and facilitate future access by the 
Company to public equity markets. Pending the use of proceeds from this 
offering the Company invested such proceeds in short-term, interest 
bearing, investment grade obligations.  During the three and nine months 
ended October 26, 1997, the Company continued to invest the net proceeds 
from the Company's initial public offering in short-term, interest 
bearing, investment grade obligations.

        None of the expenses incurred in connection with the offering 
constituted direct or indirect payments to directors, officers, general 
partners of the issuer or their associates, or to persons owning ten 
percent or more of any class of equity securities or the issuer or to 
affiliates of the issuer.

Item 3.        Defaults Upon Senior Securities

               None.

Item 4.        Submission of Matters to a Vote of Security Holders

               None.

Item 5.        Other Information

               Not applicable.

Item 6.        Exhibits and Reports on Form 8-K

               (a)  Exhibits

<page 23>

Exhibit 
Number                Description
10.1        Lease Agreement, dated as of October 9,1997, between 
            Registrant and A&P Family Investments, as landlord for the 
            leased premises located at 3250 Jay Street.

10.2        Amendment 1, dated as of October 15, 1997, between 
            Registrant and A&P Family Investments, as landlord for the 
            leased premises located at 3260 Jay Street.

10.3        Amendment to Agreement dated as of November 20, 1995, 
            between Registrant and Mitsubishi International Corporation, 
            as amended.

11.1        Computation of Pro Forma Net Income (Loss) Per Share
 
27.1        Financial Data Schedule

           (b)  Reports on Form 8-K

           The Company did not file any reports on Form 8-K during the 
           three months ended October 31, 1997.
               
<page 24>

                                SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the 
Registrant has duly caused this report to be signed on its behalf by the 
undersigned thereunto duly authorized.


                          NEOMAGIC CORPORATION
                              (Registrant)



                         /S/ MERLE MC CLENDON
                         --------------------
                           MERLE MC CLENDON
                       Vice President, Finance
                     and Chief Financial Officer
             (Principal Financial and Accounting Officer)

                          December 3, 1997

<page 25>

EXHIBIT INDEX

Exhibit                                                        Page       
Numbers                       Description                      Number
-------                       -----------                      ------          

10.1        Lease Agreement, dated as of October 9,1997, between Registrant 
            and A&P Family Investments, as landlord for the leased premises 
            located at 3250 Jay Street.

10.2        Amendment 1, dated as of October 15, 1997, between Registrant and 
            A&P Family Investments, as landlord for the leased premises 
            located at 3260 Jay Street.

10.3        Amendment to Agreement dated as of November 20, 1995, between 
            Registrant and Mitsubishi International Corporation, as amended.

11.1        Computation of Pro Forma Net Income (Loss) Per Share

27.1        Financial Data Schedule

<page 26>

Exhibit 10.1
============

LEASE AGREEMENT                                     OWNER:   60   
                                                     PROP:   605  
                                                     UNIT:   1    
                                                     TENANT: 60503 

     THIS LEASE, made this   9th   day of  October   1997  between 
BOYD C. SMITH, Trustee, or his Successor Trustee, UTA dated 12/27/76 
RICHARD T. PEERY 1976 CHILDREN TRUSTS) and LOUIS B. 
SULLIVAN, Trustee, or his Successor Trustee, UTA dated 12/27/76 (JOHN 
ARRILLAGA 1976 CHILDREN TRUSTS) as amended, hereinafter called Landlord,
and NEOMAGIC CORPORATION, a California corporation, hereinafter called Tenant.


WITNESSETH:

Landlord hereby leases to Tenant and Tenant hereby hires and takes from 
Landlord those certain premises (the "Premises") outlined in red on Exhibit 
"A" attached hereto and incorporated herein by this reference thereto more 
particularly described as follows:

All of that certain 45,000+ square foot, two-story building located at 3250 
Jay Street, Santa Clara, California 95054.  Said Premises is more particularly 
shown within the area outlined in Red on Exhibit A attached hereto. The entire 
parcel, of which the Premises is a part, is shown within the area outlined in 
Green on Exhibit A attached. The Premises is leased on an "as-is" basis, in 
its present condition, and in the configuration as shown in Red on Exhibit B 
attached hereto.

As used herein the Complex shall mean and include all of the land outlined in 
Green and described in Exhibit A attached hereto and all of the buildings, 
improvements, fixtures and equipment now or hereafter situated on said land.  
Said letting and hiring is upon and subject to the terms, covenants and 
conditions hereinafter set forth and Tenant covenants as a material part of 
the consideration for this Lease to perform and observe each and all of said 
terms, covenants and conditions. This Lease is made upon the conditions of 
such performance and observance.

1. USE Tenant shall use the Premises only in conformance with applicable 
governmental laws, regulations, rules and ordinances for the purpose of 
general office, light manufacturing, research and development, and storage and 
other uses necessary for Tenant to conduct Tenant's business, provided that 
such uses shall be in accordance with all applicable governmental laws and 
ordinances, and for no other purpose.  Tenant shall not do or permit to be 
done in or about the Premises or the Complex nor bring or keep or permit to be 
brought or kept in or about the Premises or the Complex anything which is 
prohibited by or will in any way increase the existing rate of (or otherwise 
affect) fire or any insurance covering the Complex or any part thereof, or any 
of its contents, or will cause a cancellation of any insurance covering the 
Complex or any part thereof, or any of its contents. Tenant shall not do or 
permit to be done anything in, on or about the Premises or the Complex which 
will in any way obstruct or interfere with the rights of other tenants or 
occupants of the Complex or injure or annoy them, or use or allow the Premises 
to be used for any improper, immoral, unlawful or objectionable purpose, nor 
shall Tenant cause, maintain or permit any nuisance in, on or about the 
Premises or the Complex. No sale by auction shall be permitted on the 
Premises. Tenant shall not place any loads upon the floors, walls, or ceiling, 
which endanger the structure, or place any harmful fluids or other materials 
in the drainage system of the building, or overload existing electrical or 
other mechanical systems.  No waste materials or refuse shall be dumped upon 
or permitted to remain upon any part of the Premises or outside of the 
building in which the Premises are a part, except in trash containers placed 
inside exterior enclosures designated by Landlord for that purpose or inside 
of the building proper where designated by Landlord.  No materials, supplies, 
equipment, finished products or semi-finished products, raw materials or 
articles of any nature shall be stored upon or permitted to remain outside the 
Premises or on any portion of common area of the Complex. No loudspeaker or 
other speaker or other device, system or apparatus which can be heard outside 
the Premises shall be used in or at the Premises without the prior written 
consent of Landlord. Tenant shall not commit or suffer to be committed any 
waste in or upon the Premises. Tenant shall indemnify, defend and hold 
Landlord harmless against any loss, expense, damage, attorneys' fees or 
liability arising out of failure of Tenant to comply with any applicable law.  
Tenant shall comply with any covenant, condition or restriction ("CC&Rs") 
affecting the Premises. The provisions of this paragraph are for the benefit 
of Landlord only and shall not be construed to be for the benefit of any 
tenant or occupant of the Complex.

2.  TERM*

    A.    The term of this Lease shall be for a period of FIVE, (5) years FOUR 
(4) months (unless sooner terminated as hereinafter provided) and, subject to 
Paragraphs 55, shall commence on the 1st day of January 1998 and end on the 
30th day April of 2003. 

    B.    Possession of the Premises shall be deemed tendered and the term of 
this Lease shall commence on January 1, 1998, or:

(a)  One day after a Certificate of Occupancy is granted by the proper 
governmental agency, or, if the governmental agency having jurisdiction 
over the area in which the Premises are situated does not issue 
certificates of occupancy, then the same number of days after 
certification by Landlord's architect or contractor that Landlord's 
construction work has been completed; or
(b)  Upon the occupancy of the Premises by any of Tenant's operating 
personnel; or
(c)  When the Tenant Improvements have been substantially completed for 
Tenant's use and occupancy
(d)  As otherwise agreed in writing.

3.  POSSESSION.  If Landlord, for any reason whatsoever, cannot deliver 
possession of said premises to Tenant at the commencement of the said term, as 
herein before specified, this Lease shall not be void or voidable: no 
obligation of Tenant shall be affected thereby, nor shall Landlord or 
Landlord's agents be liable to Tenant for any loss or damage resulting 
therefrom: but in that event the commencement and termination dates of the 
Lease, and all other dates affected thereby shall be revised to conform to the 
date of Landlord's delivery of possession, as specified in Paragraph 2(b), 
above. The above is however subject to the provision that the period of delay, 
of delivery of the premises shall not exceed 60 days from the commencement 
date herein (except those delays caused by Acts of God, strikes, war, 
utilities, governmental bodies, weather, unavailable materials, and delays 
beyond Landlord's control up to a maximum of 180 days shall be excluded in 
calculating such period) in which instance Tenant, at its option, may by 
written notice to Landlord, terminate this Lease.

*It is agreed in the event said Lease commences on a date other than the first 
day of the month the term of the Lease will be extended to account for the 
number of days in the partial month. The Basic Rent during the resulting 
partial month will be pro-rated (for the number of days in the partial month) 
at the Basic Rent scheduled for the projected commencement date as shown in 
Paragraph 43.

<PAGE>

4.  RENT

  A.  Basic Rent.  Tenant agrees to pay to Landlord at such place as Landlord 
may designate without deduction, offset, prior notice, or demand, and Landlord 
agrees to accept as Basic Rent for the leased Premises the total sum of FIVE 
MILLION SIX HUNDRED FORTY THREE THOUSAND AND NO/100 ($5,643,000.00) Dollars in 
lawful money of the United States of America, payable as follows:

  See Paragraph 43 for Basic Rent Schedule

  B.  Time for Payment.  In the event that the term of this Lease commences on 
a date other than the first day of a calendar month, on the date of 
commencement of the term hereof Tenant shall pay to Landlord as rent for the 
period from such date of commencement to the first day of the next succeeding 
calendar month that proportion of the monthly rent hereunder which the number 
of days between such date of commencement and the first day of the next 
succeeding calendar month bears to thirty (30). In the event that the term of 
this Lease for any reason ends on a date other than the last day of a calendar 
month, on the first day of the last calendar month, of the term hereof Tenant 
shall pay to Landlord as rent for the period from said first day of said last 
calendar month to and including the last day of the term hereof that 
proportion of the monthly rent hereunder which the number of days between said 
first day of said last calendar month and the last day of the term hereof 
bears to thirty (30).

  C.  Late Charge.  Notwithstanding any other provision of this Lease, if 
Tenant is in default in the payment of rental as set forth in this Paragraph 4 
when due, or any part thereof.  Tenant agrees to pay Landlord, in addition to 
the delinquent rental due, a late charge for each rental payment in default 
ten (10) days.  Said late charge shall equal ten (10%) percent of each rental 
payment so in default.

  D.  Additional Rent.  Beginning with the commencement date of the term of 
this Lease.  Tenant shall pay to Landlord in addition to the Basic Rent and as 
Additional Rent the following:

(a)    Tenant's proportionate share of all Taxes relating to the Complete 
as set forth in Paragraph 12, and
(b)    Tenant's proportionate share of all insurance premiums relating to 
the Complex, as set forth in Paragraph 15, and
(c)  Tenant's proportionate share of expenses for the operation, 
management, maintenance and repair of the Building (including common 
areas of the Building) and Common Areas of the Complex in which the 
Premises are located as set forth in Paragraph 7, and
(d)    All charges, costs and expenses, which Tenant is required to pay 
hereunder, together with all interest and penalties, costs and 
expenses including attorney's fees and legal expenses, that may accrue 
thereto in the event of Tenant's failure to pay such amounts, and all 
damages, reasonable costs and expenses which Landlord may incur by 
reason of default of Tenant or failure on Tenant's part to comply with 
the terms of this Lease. In the event of nonpayment by Tenant of 
Additional Rent Landlord shall have all the rights and remedies with 
respect thereto as Landlord has for nonpayment of rent.

The Additional Rent due hereunder shall be paid to Landlord or Landlord's 
agent (i) within five days for taxes and insurance and within thirty (30) days 
for all other Additional Rent Items after presentation of invoice from 
Landlord or Landlord's agent selling forth such Additional Rent and/or (ii) at 
the option of Landlord, Tenant shall pay to Landlord monthly, in advance, 
Tenant's prorata share of an amount estimated by Landlord to be Landlord's 
approximate average monthly expenditure for such Additional Rent items, which 
estimated amount shall be reconciled within 120 days of the end of each 
calendar year or more frequently if Landlord so elects to do so at Landlord's 
sole and absolute discretion, as compared to Landlord's actual expenditure for 
said Additional Rent items, with Tenant paying to Landlord, upon demand, any 
amount of actual expenses expended by Landlord in excess of said estimated 
amount, or Landlord refunding to Tenant (providing Tenant is not in default in 
the performance of any of the terms, covenants and conditions of this Lease) 
any amount of estimated payments made by Tenant in excess of Landlord's actual 
expenditures for said Additional Rent items. Within thirty (30) days after 
receipt of Landlord's reconciliation, Tenant shall have the right, at Tenant's 
sole expense, to audit, at a mutually convenient time at Landlord's office, 
Landlord's records relating to the foregoing expenses.  Such audit must be 
conducted by Tenant or an independent nationally recognized accounting firm 
that is not being compensated by Tenant or other third party on a contingency 
fee basis.  Landlord shall be provided a complete copy of said audit at no 
expense to Landlord.  If such audit reveals that Landlord has overcharged 
Tenant, the amount overcharged shall be credited to Tenant's account within 
thirty (30) days after the audit is concluded.

The respective obligations of Landlord and Tenant under this paragraph shall 
survive the expiration or other termination of the term of this Lease, and if 
the term hereof shall expire or shall otherwise terminate on a day other than 
the last day of a calendar year, the actual Additional Rent incurred for the 
calendar year in which the term hereof expires or otherwise terminates shall 
be determined and settled on the basis of the statement of actual Additional 
Rent for such calendar year and shall be prorated in the proportion which the 
number of days in such calendar year preceding such expiration or termination 
bears to 365. 

  E.  Place of Payment of Rent and Additional Rent. All Basic Rent hereunder 
and all payments hereunder for Additional Rent shall be paid to Landlord at 
the office of Landlord at A&P Family Investments, c/o Peery/Arrillaga, 2560 
Mission College Blvd., #101, Santa Clara, CA 95054 or to such other person or 
to such other place as Landlord may from time to time designate in writing.

  F.  Security Deposit. Concurrently with Tenant's execution of this Lease, 
Tenant shall deposit with Landlord the sum of ONE HUNDRED SEVENTY SIX THOUSAND 
FIVE HUNDRED AND NO/100 ($ 176,500.00) Dollars. Said sum shall be held by 
Landlord as a Security Deposit for the faithful performance by Tenant of all 
of the terms, covenants, and conditions of this Lease to be kept and performed 
by Tenant during the term hereof. If Tenant defaults with respect to any 
provision of this Lease, including, but not limited to, the provisions 
relating to the payment of rent and any of the monetary sums due herewith. 
Landlord may (but shall not be required to) use, apply or retain all or any 
part of this Security Deposit for the payment of any other amount which 
Landlord may spend by reason of Tenant's default or to compensate Landlord for 
any other loss or damage which Landlord may suffer by reason of Tenant's 
default. If any portion of said Deposit is so used or applied, Tenant shall, 
within ten (10) days after written demand therefor, deposit cash with Landlord 
in the amount sufficient to restore the Security Deposit to its original 
amount. Tenant's failure to do so shall be a material breach of this Lease. 
Landlord shall not be required to keep this Security Deposit separate from its 
general funds, and Tenant shall not be entitled to interest on such Deposit. 
If Tenant fully and faithfully performs every provision of this Lease to be 
performed by it, the Security Deposit or any balance thereof shall be returned 
to Tenant (or at Landlord's option, to the last assignee of Tenant's interest 
hereunder at the expiration of the Lease term and after Tenant has vacated the 
Premises. In the event of termination of Landlord's interest in this Lease, 
Landlord shall transfer said Deposit to Landlord's successor in interest 
whereupon  Tenant agrees to release Landlord from liability for the return of 
such Deposit or the accounting therefor.

5.  RULES AND REGULATIONS AND COMMON AREA Subject to the terms and conditions 
of this Lease and such Rules and Regulations at Landlord may from time to time 
prescribe, Tenant and Tenant's employees, invitees and customers shall, in 
common with other occupants of the Complex in which the Premises are located, 
and their respective employees, invitees and customers, and others entitled to 
the use thereof, have the non-exclusive right to use the access roads, parking 
areas, and facilities provided and designated by Landlord for the general use 
and convenience of the occupants of the Complex in which the Premises are 
located, which areas and facilities are referred to herein as "Common Area."  
This right shall terminate upon the termination of this Lease.  Landlord 
reserves the right from time to time to make changes in the shape, size, 
location, amount and extent of Common Area. Landlord further reserves the 
right to promulgate such reasonable rules and regulations relating to the use 
of the Common Area, and any part or parts thereof, as Landlord may deem 
appropriate for the best interests of the occupants of the Complex. The Rules 
and Regulations shall be binding upon Tenant upon delivery of a copy of them 
to Tenant, and Tenant shall abide by them and cooperate in their observance. 
Such Rules and Regulations may be amended by Landlord from time to time, with 
or without advance notice, and all amendments shall be effective upon delivery 
of a copy to Tenant. Landlord shall not be responsible to Tenant for the non-
performance by any other tenant or occupant of the Complex of any of said 
Rules and Regulations. 

Landlord shall operate, manage and maintain the Common Area. The manner in 
which the Common Area shall be maintained and the expenditures for such 
maintenance shall be at the discretion of Landlord.

*    $88,250.00 Cash due upon Lease execution
    $88,250.00 Promissory Note due January 1, 1999

<PAGE>

6.  PARKING Tenant shall have the right to use with other tenants or occupants 
of the Complex 150 parking spaces in the common parking areas of the Complex.  
Tenant agrees, that Tenant, Tenant's employees, agents, representatives and/or 
invitees shall not use parking spaces in excess of said 150 spaces allocated 
to Tenant hereunder. Landlord shall have the right, at Landlord's sole 
discretion, to specifically designate the location of Tenant's parking spaces 
within the common parking areas of the Complex in the event of a dispute among 
the tenants occupying the building and/or Complex referred to herein, in which 
event Tenant agrees that Tenant, Tenant's employees, agents, representatives 
and/or invitees shall not use any parking spaces other than those parking 
spaces specifically designated by Landlord for Tenant's use. Said parking 
spaces, if specifically designated by Landlord to Tenant, may be relocated by 
Landlord at any time, and from time to time. Landlord reserves the right, at 
Landlord's sole discretion, to rescind any specific designation of parking 
spaces, thereby returning Tenant's parking spaces to the common parking area. 
Landlord shall give Tenant written notice of any change in Tenant's parking 
spaces. Tenant shall not, at any time, park, or permit to be parked, any 
trucks or vehicles adjacent to the loading areas so as to interfere in any way 
with the use of such areas, nor shall Tenant at any time park, or permit the 
parking of Tenant's trucks or other vehicles or the trucks and vehicles of 
Tenant's suppliers or others, in any portion of the common area not designated 
by Landlord for such use by Tenant.  Tenant shall not park not permit to be 
parked, any inoperative vehicles or equipment on any portion of the common 
parking area or other common areas of the Complex. Tenant agrees to assume 
responsibility for compliance by its employees with the parking provision 
contained herein. If Tenant or its employees park in other than such 
designated parking areas, then Landlord may charge Tenant, as an additional 
charge, and Tenant agrees to pay, ten ($10.00) Dollars per day for each day or 
partial day each such vehicle is parked in any area other than that 
designated. Tenant hereby authorizes Landlord at Tenant's sole expense to tow 
away from the Complex any vehicle belonging to Tenant or Tenant's employees 
parked in violation of these provisions, or to attach violation stickers or 
notices to such vehicles. Tenant shall use the parking areas for vehicle 
parking only, and shall not use the parking areas for storage.

7.  EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF 
THE COMPLEX.  As Additional Rent and in accordance with Paragraph 4D of this 
Lease, Tenant shall pay to Landlord Tenant's proportionate share (calculated 
on a square footage or other equitable basis as calculated by Landlord) of all  
expenses of operation, management, maintenance and repair of the Common Areas 
of the Complex including, but not limited to, license, permit, and inspection 
fees; security; utility charges associated with exterior landscaping and 
lighting (including water and sewer charges); all charges incurred in the 
maintenance and replacement of landscaped areas, lakes, parking lots, and 
paved areas (including repairs, replacement, resealing and restriping) 
sidewalks, driveways; maintenance, repair and replacement of all fixtures and 
electrical, mechanical, and plumbing systems; structural elements and exterior 
surfaces of the buildings; salaries and employee benefits of personnel and 
payroll taxes applicable thereto; supplies, materials, equipment and tools; 
the cost of capital expenditures which have the effect of reducing operating 
expenses, provided, however, that in the event Landlord makes such capital 
improvements, Landlord may amortize its investment in said improvements 
(together with interest at the rate of fifteen (15%) percent per annum on the 
unamortized balance) as an operating expense in accordance with standard 
accounting practices, provided, that such amortization is not at a rate 
greater than the anticipated savings in the operating expenses.

"Additional Rent" as used herein shall not include Landlord's debt repayments; 
interest on charges; expenses directly or indirectly incurred by Landlord for 
the benefit of any other tenant; cost for the installation of partitioning or 
any other tenant improvements; cost of attracting tenants; depreciation; 
interest, or executive salaries.

8. ACCEPTANCE AND SURRENDER OF PREMISES By entry hereunder. Tenant accepts the 
Premises as being in good and sanitary order, condition and repair and accepts 
the building and improvements included in the Premises in their present 
condition and without representation or warranty by Landlord as to the 
condition of such building or as to the use or occupancy which may be made 
thereof. Any exceptions to the foregoing must be by written agreement executed 
by Landlord and Tenant. Tenant agrees on the last day of the Lease term, or on 
the sooner termination of this Lease, to surrender the Premises promptly and 
peaceably to Landlord in good condition and repair (damage by Acts of God, 
fire, normal wear and tear excepted), with all interior walls painted, or 
cleaned so that they appear freshly painted, and repaired and replaced, if 
damaged; all floors cleaned and waxed; all carpets cleaned and shampooed; the 
airconditioning and heating equipment serviced by a reputable and licensed 
service firm and in good operating condition (provided the maintenance of such 
equipment has been Tenant's responsibility during the term of this Lease) 
together with all alterations, additions, and improvements which may have been 
made in, to, or on the Premises (except movable trade fixtures installed at 
the expense of Tenant) except that Tenant shall ascertain from Landlord within 
thirty (30) days before the end of the term of this Lease whether Landlord 
desires to have the Premises or any part or parts thereof restored to their 
condition and configuration as when the Premises were delivered to Tenant and 
if Landlord shall so desire, then Tenant shall restore said Premises or such 
part or parts thereof before the end of this Lease at Tenant's sole cost and 
expense. Tenant, on or before the end of the term or sooner termination of 
this Lease, shall remove all of Tenant's personal property and trade fixtures 
from the Premises, and all property not so removed on or before the end of the 
term or sooner termination of this Lease shall be deemed abandoned by Tenant 
and title to same shall thereupon pass to Landlord without compensation to 
Tenant. Landlord may, upon termination of this Lease, remove all moveable 
furniture and equipment so abandoned by Tenant, at Tenant's sole cost, and 
repair any damage caused by such removal at Tenant's sole cost. If the 
Premises be not surrendered at the end of the term or sooner termination of 
this Lease, Tenant shall indemnify Landlord against loss or liability 
resulting from the delay by Tenant in so surrendering the Premises including, 
without limitation, any claims made by any succeeding tenant founded on such 
delay. Nothing contained herein shall be construed as an extension of the term 
hereof or as a consent of Landlord to any holding over by Tenant. The 
voluntary or other surrender of this Lease or the Premises by Tenant or a 
mutual cancellation of this Lease shall not work as a merger and, at the 
option of Landlord, shall either terminate all or any existing subleases or 
subtenancies or operate as an assignment to Landlord of all or any such 
subleases or subtenancies.

9.  ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made, any 
alteration or addition to the Premises, or any part thereof, without the 
written consent of Landlord first had and obtained by Tenant, but at the cost 
of Tenant, and any addition to, or alteration of, the Premises, except 
moveable furniture and trade fixtures, shall at once become a part of the 
Premises and belong to Landlord. Landlord reserves the right to approve all 
contractors and mechanics proposed by Tenant to make such alterations and 
additions. Tenant shall retain title to all moveable furniture and trade 
fixtures placed in the Premises. All heating, lighting, electrical, 
airconditioning, floor to ceiling partitioning, drapery, carpeting, and floor 
installations made by Tenant, together with all property that has become an 
integral part of the Premises, shall not be deemed trade fixtures. Tenant 
agrees that it will not proceed to make such alteration or additions, without 
having obtained consent from Landlord to do so, and until five (5) days from 
the receipt of such consent, in order that Landlord may post appropriate 
notices to avoid any liability to contractors or material suppliers for 
payment for Tenant's improvements. Tenant will at all times permit such 
notices to be posted and to remain posted until the completion of work. Tenant 
shall, if required by Landlord, secure at Tenant's own cost and expense, a 
completion and lien indemnity bond, satisfactory to Landlord, for such work.

Tenant further covenants and agrees that any mechanic's lien filed against the 
Premises or against the Complex for work claimed to have been done for, or 
materials claimed to have been furnished to Tenant, will be discharged by 
Tenant, by bond or otherwise, within ten (10) days after the filing thereof, 
at the cost and expense of Tenant. Any exceptions to the foregoing must be 
made in writing and executed by both Landlord and Tenant.

10. TENANT MAINTENANCE Tenant shall, at its sole cost and expense, keep and 
maintain the Premises (including appurtenances) and every part thereof in a 
high standard of maintenance and repair, and in good and sanitary condition. 
Tenant's maintenance and repair responsibilities herein referred to include, 
but are not limited to, all windows, window frames, plate glass, glazing, 
truck doors, plumbing systems (such as water and drain lines, sinks, toilets, 
faucets, drains, showers and water fountains), electrical systems (such as 
panels, conduits, outlets, lighting fixtures, lamps, bulbs, tubes, ballasts), 
heating and air-conditioning systems (such as compressors, fans, air handlers, 
ducts, mixing boxes, thermostats, time clocks, boilers, heaters, supply and 
return grills), store fronts, roofs, downspouts, all interior improvements 
within the premises including but not limited to wall coverings, window 
coverings, carpet, floor coverings, partitioning, ceilings, doors (both 
interior and exterior, including closing mechanisms, latches, locks, skylights 
(if any), automatic fire extinguishing systems, and elevators and all other 
interior improvements of any nature whatsoever. Tenant agrees to provide 
carpet shields under all rolling chairs or to otherwise be responsible for 
wear and tear of the carpet caused by such rolling chairs if such wear and 
tear exceeds that caused by normal foot traffic in surrounding areas. Areas of 
excessive wear shall be replaced at Tenant's sole expense upon Lease 
termination. Tenant hereby waives all rights under, and benefits of, 
subsection 1 of Section 1932 and Section 1941 and 1942 of the California Civil 
Code and under any similar law, statute or ordinance now or hereafter in 
effect.

11.  UTILITIES Tenant shall pay promptly, as the same become due, all charges 
for water, gas, electricity, telephone, telex and other electronic 
communications service, sewer service, waste pick-up and any other utilities, 
materials or services furnished directly to or used by Tenant on or about the 
Premises during the term of this Lease, including, without limitation, any 
temporary or permanent utility surcharge or other exactions whether or not 
hereinafter imposed.

Landlord shall not be liable for and Tenant shall not be entitled to any 
abatement or reduction of rent by reason of any interruption or failure of 
utility services to the Premises when such interruption or failure is caused 
by accident, breakage, repair, strikes, lockouts, or other labor disturbances 
or labor disputes of any nature, or by any other cause, similar or dissimilar, 
beyond the reasonable control of Landlord.

12.  TAXES Tenant shall not be responsible for any Real Estate tax increase 
related to tenant improvements constructed for another tenant's use outside 
the Premises leased hereunder.
  A.  As Additional Rent and in accordance with Paragraph 4 D of this Lease, 
Tenant shall pay to Landlord Tenant's proportionate share of all Real Property 
Taxes, which prorata share shall be allocated to the leased premises by square 
footage or other equitable basis, as calculated by Landlord. The term "Real 
Property Taxes", as used herein, shall mean (i) all taxes, assessments, levies 
and other charges of any kind or nature whatsoever, general and special, 
foreseen and unforeseen (including all installments of principal and interest 
required to pay any general or special assessments for public improvements and 
any increases resulting from reassessments caused by

<PAGE>

 any change in ownership 
of the Complex) now or hereafter imposed by any governmental or quasi-
governmental authority or special district having the direct or indirect power 
to tax or levy assessments, which are levied or assessed against, or with 
respect to the value, occupancy or use of, all or any portion of the Complex 
(as now constructed or as may at any time hereafter be constructed, altered, 
or otherwise changed) or Landlord's interest therein; any improvements located 
within the Complex (regardless of ownership); the fixtures, equipment and 
other property of Landlord, real or personal, that are an integral part of and 
located in the Complex; or parking areas, public utilities, or energy within 
the Complex; (ii) all charges, levies or fees imposed by reason of 
environmental regulation or other governmental control of the Complex; and 
(iii) all costs and fees (including attorneys' fees) incurred by Landlord in 
contesting any Real Property Tax and in negotiating with public authorities as 
to any Real Property Tax. If at any time during the term of this Lease the 
taxation or assessment of the Complex prevailing as of the commencement date 
of this Lease shall be altered so that in lieu of or in addition to any Real 
Property Tax described above there shall be levied, assessed or imposed 
(whether by reason of a change in the method of taxation or assessment, 
creation of a new tax or charge, or any other cause) an alternate or 
additional tax or charge (i) on the value, use or occupancy of the Complex or 
Landlord's interest therein or (ii) on or measured by the gross receipts, 
income or rentals from the Complex, on Landlord's business of leasing the 
Complex, or computed in any manner with respect to the operation of the 
Complex, then any such tax or charge, however designated, shall be included 
within the meaning of the term "Real Property Taxes" for purposes of this 
Lease, and if Landlord has the option to either pay the entire assessment in 
cash or go to bond, and if Landlord elects to pay the entire assessment in 
cash in lieu of going to bond, the entire portion of the assessment assigned 
to Tenant's Leased Premises will be prorated over the same period that the 
assessment would have been prorated had the assessment gone to bond. If any 
Real Property Tax is based upon property or rents unrelated to the Complex, 
then only that part of such real Property Tax that is fairly allocable to the 
Complex shall be included within the meaning of the term "Real Property 
Taxes." Notwithstanding the foregoing, the term "Real Property Taxes" shall 
not include estate, inheritance, gift or franchise taxes of Landlord or the 
federal or state net income tax imposed on Landlord's income from all sources.  
Notwithstanding the above, it is agreed that if any special assessments for 
capital improvements are assessed, and if Landlord has the option to either 
pay the entire assessment in cast or got to bond, and if Landlord elects to 
pay the entire assessment in cash in lieu of going to bond, the entire portion 
of the assessment assigned to Tenant's Leased Premises will be prorated over 
the same period that the assessment would have been prorated had gone to bond.

  B.  Taxes on Tenant's Property
    (a)    Tenant shall be liable for and shall pay ten days before 
delinquency, taxes levied against any personal property or trade 
fixtures placed by Tenant in or about the Premises. If any such taxes 
on Tenant's personal property or trade fixtures are levied against 
Landlord or Landlord's property or if the assessed value of the 
Premises is increased by the inclusion therein of a value placed upon 
such personal property or trade fixtures of Tenant and if Landlord, 
after written notice to Tenant, pays the taxes based on such increased 
assessment, which Landlord shall have the right to do regardless of 
the validity thereof, but only under proper protest if requested by 
Tenant, Tenant shall upon demand, as the case may be, repay to 
Landlord the taxes so levied against Landlord, or the proportion of 
such taxes resulting from such increase in the assessment; provided 
that in any such event Tenant shall have the right, in the name of 
Landlord and with Landlord's full cooperation, to bring suit in any 
court of competent jurisdiction to recover the amount of any such 
taxes so paid under protest, and any amount so recovered shall belong 
to Tenant.

    (b)    if the Tenant improvements in the Premises, whether installed, 
and/or paid for by Landlord or Tenant and whether or not affixed to 
the real property so as to become a part thereof, are assessed for 
real property tax purposes at a valuation higher than the valuation at 
which standard office improvements inn other space in the Complex are 
assessed, then the real property taxes and assessments levied against 
Landlord or the Complex by reason of such excess assessed valuation 
shall be deemed to be taxes levied against personal property of Tenant 
and shall be governed by the provisions of 12Ba above.  If the records 
of the County Assessor are available and sufficiently detailed to 
serve as a basis for determining whether said Tenant improvements are 
assessed at a higher valuation than standard office improvements in 
other space in the Complex, such records shall be binding on both the 
Landlord and the Tenant.  If the records of the County Assessor are 
not available or sufficiently detailed to serve as a basis for making 
said determination, the actual cost of construction shall be used.
 
13.  LIABILITY INSURANCE.  Tenant at Tenant's expense, agrees to keep in force 
during the term of this Lease a policy of commercial general liability 
insurance with a combined single limit coverage of not less than Two Million 
Dollars ($2,000,000) per occurrence for injuries to or death of persons 
occurring in, on or about the Premises or the Complex, and property damage 
insurance with limits of $500,000.  The policy or policies affecting such 
insurance, certificates of insurance of which shall be furnished to Landlord, 
shall name Landlord as additional insureds, and shall insure any liability of 
Landlord, contingent or otherwise, as respects to insurable acts or omissions 
of Tenant, its agents, employees or invitees or otherwise by any conduct or 
transactions of any of said persons in or about or concerning the Premises, 
including any failure of Tenant to observe or perform any of its obligations 
hereunder; shall be issued by an insurance company admitted to transact 
business in the State of California; and shall provide that the insurance 
effected thereby shall not be canceled, except upon thirty (30) days' prior 
written notice to Landlord. If, during the term of this Lease, in the 
considered opinion of Landlord's Lender, insurance advisor, or counsel, the 
amount of insurance described in this paragraph 13 is not adequate, Tenant 
agrees to increase said coverage to such reasonable amount as Landlord's 
Lender, insurance advisor or counsel shall deem adequate.

14. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE.  
Tenant shall maintain a policy or policies of fire and property damage 
insurance in "all risk" form with a sprinkler leakage endorsement insuring the 
personal property, inventory, trade fixtures, and leasehold improvements 
within the leased Premises for the full replacement value thereof. The 
proceeds from any of such policies shall be used for the repair or replacement 
of such items so insured.

Tenant shall also maintain a policy or policies of workman's compensation 
insurance and any other employee benefit insurance sufficient to comply with 
all laws.

15. PROPERTY INSURANCE  Landlord shall purchase and keep in force and as 
Additional Rent and in accordance with Paragraph 4D of this Lease. Tenant 
shall pay to Landlord (or Landlord's agent if so directed by Landlord) 
Tenant's proportionate share (calculated on a square footage or other 
equitable basis as calculated by Landlord) of the deductibles on insurance 
claims and the cost of policy or policies of insurance covering loss or damage 
to the Premises and Complex in the amount of the full replacement value 
thereof, providing protection against those perils included within the 
classification of "all  risks" insurance and flood and/or earthquake 
insurance, if available, plus a policy of rental income insurance in the 
amount of one hundred (100%) percent of twelve (12) months Basic Rent, plus 
sums paid as Additional Rent and any deductibles related thereto.  If such 
insurance cost is increased due to Tenant's use of the Premises or the 
Complex, Tenant agrees to pay to Landlord the full cost of such increase. 
Tenant shall have no interest in nor any right to the proceeds of any 
insurance procured by Landlord for the Complex.

Landlord and Tenant do each hereby respectively release the other, to the 
extent of insurance coverage of the releasing party, from any liability for 
loss or damage caused by fire or any of the extended coverage casualties 
included in the releasing party's insurance policies, irrespective of the 
cause of such fire or casualty; provided, however, that if the insurance 
policy of either releasing party prohibits such waiver, then this waiver shall 
not take effect until consent to such waiver is obtained. If such waiver is so 
prohibited, the insured party affected shall promptly notify the other party 
thereof.

16. INDEMNIFICATION  Landlord shall not be liable to Tenant and Tenant hereby 
waives all claims against Landlord for any injury to or death of any person or 
damage to or destruction of property in or about the Premises or the Complex 
by or from any cause whatsoever, including, without limitation, gas, fire, 
oil, electricity or leakage of any character from the roof, walls, basement or 
other portion of the Premises or the Complex but excluding, however, the 
willful misconduct or negligence of Landlord, its agents, servants, employees, 
invitees, or contractors of which negligence Landlord has knowledge and 
reasonable time to correct. Except as to injury to persons or damage to 
property to the extent arising from the willful misconduct or the negligence 
of Landlord, its agents, servants, employees, invitees, or contractors. Tenant 
shall hold Landlord harmless from and defend Landlord against any and all 
expenses, including reasonable attorneys' fees, in connection therewith, 
arising out of any injury to or death of any person or damage to or 
destruction of property occurring in, on or about the Premises, or any part 
thereof, from any cause whatsoever.

17.  COMPLIANCE  Tenant, at its sole cost and expense, shall promptly comply 
with all laws, statutes, ordinances and governmental rules, regulations or 
requirements now or hereafter in effect; with the requirements of any board of 
fire underwriters or other similar body now or hereafter constituted; and with 
any direction or occupancy certificate issued pursuant to law by any public 
officer; provided, however, that no such failure shall be deemed a breach of 
the provisions if Tenant, immediately upon notification, commences to remedy 
or rectify said failure. The judgment of any court of competent jurisdiction 
or the admission of Tenant in any action against Tenant, whether Landlord be a 
party thereto or not, that Tenant has violated any such law, statute, 
ordinance or governmental rule, regulation, requirement, direction or 
provision, shall be conclusive of that fact as between Landlord and Tenant. 
This paragraph shall not be interpreted as requiring Tenant to make structural 
changes or improvements, except to the extent such changes or improvements are 
required as a result of Tenant's use of the Premises. Tenant shall, at its 
sole cost and expense, comply with any and all requirements pertaining to said 
Premises, of any insurance organization or company, necessary for the 
maintenance of reasonable fire and public liability insurance covering the 
Premises.

18. LIENS  Tenant shall keep the Premises and the Complex free from any liens 
arising out of any work performed, materials furnished or obligation incurred 
by Tenant. In the event that Tenant shall not, within ten (10) days following 
the imposition of such lien, cause the same to be released of record. Landlord 
shall have, in addition to all other remedies provided herein and by law, the 
right but no obligation, to cause the same to be released by such means as it 
shall deem proper, including payment of the claim giving rise to such lien. 
All sums paid by Landlord for such purpose, and all expenses incurred by it in 
connection therewith, shall be payable to Landlord by Tenant on demand with 
interest at the prime rate of interest as quoted by the Bank of America.

<PAGE>

19.  ASSIGNMENT AND SUBLETTING   Tenant shall not assign, transfer, or 
hypothecate the leasehold estate under this Lease, or any interest herein, and 
shall not sublet the Premises, or any part thereof, or any right or privilege 
appurtenant thereto, or suffer any other person or entity to occupy or use the 
Premises, or any portion thereof, without, in each case, the prior written 
consent of Landlord which consent will not be unreasonably withheld. As a 
condition for granting this consent to any assignment, transfer, or 
subletting, Landlord shall require Tenant to pay to Landlord, as Additional 
Rent, all rents and/or additional consideration due Tenant from its assignees, 
transferees, or subtenants in excess of the rent payable by Tenant to Landlord 
hereunder for the assigned, transferred and/or subleased space; provided, 
however, that before sharing such excess rent, Tenant shall first be entitled 
to recover from such excess rent the amount of any reasonable leasing 
commissions paid by Tenant to third parties not affiliated with Tenant.  
Tenant shall first be entitled to recover from such excess rent the amount of 
reasonable leasing commissions paid by Tenant to third parties not affiliated 
with Tenant. Tenant shall, by thirty (30) days written notice, advise Landlord 
of its intent to assign or transfer Tenant's interest in the Lease or sublet 
the Premises or any portion thereof for any part of the term hereof.  Within 
thirty (30) days after receipt of said written notice, Landlord may, in its 
sole discretion, elect to terminate this Lease as to the portion of the 
Premises described in Tenant's notice on the date specified in Tenant's notice 
by giving written notice of such election to terminate. If no such notice to 
terminate is given to Tenant with said thirty (30) day period, Tenant may 
proceed to locate an acceptable sublessee, assignee, or other transferee for 
presentment to Landlord for Landlord's approval, all in accordance with the 
terms, covenants, and conditions of this paragraph 19. If Tenant intends to 
sublet the entire Premises and Landlord elects to terminate this Lease, this 
Lease shall be terminated on the date specified in Tenant's notice. If, 
however, this Lease shall terminate pursuant to the foregoing with respect to 
less than all the Premises, the rent, as defined and reserved hereinabove 
shall be adjusted on a pro rata basis to the number of square feet retained by 
Tenant, and this Lease as so amended shall continue in full force and effect. 
In the event Tenant is allowed to assign, transfer or sublet the whole or any 
part of the Premises, with the prior written consent of Landlord, no assignee, 
transferee or subtenant shall assign or transfer this Lease, either in whole 
or in part, or sublet the whole or any part of the Premises, without also 
having obtained the prior written consent of Landlord which consent shall not 
be unreasonably withheld. A consent of Landlord to one assignment, transfer, 
hypothecation, subletting, occupation or use by any other person shall not 
release Tenant from any of Tenant's obligations hereunder or be deemed to be a 
consent to any subsequent similar or dissimilar assignment, transfer, 
hypothecation, subletting, occupation or use by any other person. Any such 
assignment, transfer, hypothecation, subletting, occupation or use without 
such consent shall be void and shall constitute a breach of this Lease by 
Tenant and shall, at the option of Landlord exercised by written notice to 
Tenant, terminate this Lease.  The leasehold estate under this Lease shall 
not, nor shall any interest therein, be assignable for any purpose by 
operation of law without the written consent of Landlord which consent shall 
not be unreasonably withheld. As a condition of its consent, Landlord shall 
require Tenant to pay all expenses in connection with the assignment, and 
Landlord shall require Tenant's assignee or transferee (or other assignees or 
transferees) to assume in writing all of the obligations under this Lease and 
for Tenant to remain liable to Landlord under the Lease.  Notwithstanding the 
above, in no event will Landlord consent to a sub-sublease.

20.  SUBORDINATION AND MORTGAGES  In the event Landlord's title or leasehold 
interest is now or hereafter encumbered by a deed of trust, upon the interest 
of Landlord in the land and buildings in which the demised Premises are 
located, to secure a loan from a lender hereinafter referred to as ("Lender") 
to Landlord,  Tenant shall, at the request of Landlord or Lender, execute in 
writing an agreement subordinating its rights under this Lease to the lien of 
such deed of trust, or, if so requested, agreeing that the lien of Lender's 
deed of trust shall be or remain subject and subordinate to the rights of 
Tenant under this Lease.  Notwithstanding any such subordination, Tenant's 
possession under this Lease shall not be disturbed if Tenant is not in default 
and so long as Tenant shall pay all rent and observe and perform all of the 
provisions set forth in this Lease.

21.  ENTRY BY LANDLORD  Landlord reserves, and shall at all reasonable times 
after at least 24 hours notice (except in emergencies) have, the right to 
enter the Premises to inspect them; to perform any services to be provided by 
Landlord hereunder; to submit the Premises to prospective purchasers, 
mortgagers or tenants; to post notices of nonresponsibility; and to alter, 
improve or repair the Premises and any portion of the Complex, all without 
abatement of rent, and may erect scaffolding and other necessary structures in 
or through the Premises where reasonably required by the character of the work 
to be performed; provided, however that the business of Tenant shall be 
interfered with to the least extent that is reasonably practical. For each of 
the foregoing purposes, Landlord shall at all times have and retain a key with 
which to unlock all of the doors in an emergency in order to obtain entry to 
the Premises, and any entry to the Premises obtained by Landlord by any of 
said means, or otherwise, shall not under any circumstances be construed or 
deemed to be a forcible or unlawful entry into or a detainer of the Premises 
or an eviction, actual or constructive, of Tenant from the Premises or any 
portion thereof. Landlord shall also have the right at any time to change the 
arrangement or location of entrances or passageways, doors and doorways, and 
corridors, elevators, stairs, toilets or other public parts of the Complex and 
to change the name, number or designation by which the Complex is commonly 
known, and none of the foregoing shall be deemed an actual or constructive 
eviction of Tenant, or shall entitle Tenant to any reduction of rent 
hereunder.

22.  BANKRUPTCY AND DEFAULT  The commencement of a bankruptcy action or 
liquidation action or reorganization action or insolvency action or an 
assignment of or by Tenant for the benefit of creditors, or any similar action 
undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's 
option, constitute a breach of this Lease by Tenant. If the trustee or 
receiver appointed to serve during a bankruptcy, liquidation, reorganization, 
insolvency or similar action elects to reject Tenant's unexpired Lease, the 
trustee or receiver shall notify Landlord in writing of its election within 
thirty (30) days after an order for relief in a liquidation action or within 
thirty (30) days after the commencement of any action. 

Within thirty (30) days after court approval of the assumption of this Lease, 
the trustee or receiver shall cure (or provide adequate assurance to the 
reasonable satisfaction of Landlord that the trustee or receiver shall cure) 
any and all previous defaults under the unexpired Lease and shall compensate 
Landlord for all actual pecuniary loss and shall provide adequate assurance of 
future performance under said Lease to the reasonable satisfaction of 
Landlord.  Adequate assurance of future performance, as used herein, includes, 
but shall not be limited to; (i) assurance of source and payment of rent, and 
other consideration due under this Lease; (ii) assurance that the assumption 
or assignment of the Lease will not breach substantially any provision, such 
as radius, location, use, or exclusivity provision, in any agreement relating 
to the above described Premises.

Nothing contained in this section shall affect the existing right of Landlord 
to refuse to accept an assignment upon commencement of or in connection with a 
bankruptcy, liquidation, reorganization or insolvency action or an assignment 
of Tenant for the benefit of creditors or other similar act.  Nothing 
contained in this Lease shall be construed as giving or granting or creating 
an equity in the demised Premises to Tenant.  In no event shall the leasehold 
estate under this Lease, or any interest therein, be assigned by voluntary or 
involuntary bankruptcy proceeding without the prior written consent of 
Landlord.  In no event shall this Lease or any rights or privileges hereunder 
be an asset of Tenant under any bankruptcy, insolvency or reorganization 
proceedings.  

The failure to perform or honor any covenant, condition or representation made 
under this Lease shall constitute a default hereunder by Tenant upon 
expiration of the appropriate grace period hereinafter provided, Tenant shall 
have a period of five (5) days from the date of written notice from Landlord 
within which to cure any default in the payment of rental or adjustment 
thereto.  Tenant shall have a period of thirty (30) days from the date of 
written notice from Landlord within which to cure any other default under this 
Lease; provided, however, that if the nature of Tenant's failure is such that 
more than thirty (30) days is reasonably required to cure the same, Tenant 
shall not be in default so long as Tenant commences performance within such 
thirty (30) day period and thereafter prosecutes the same to completion.  Upon 
an uncured default of this Lease by Tenant.  Landlord shall have the following 
rights and remedies in addition to any other rights or remedies available to 
Landlord at law or in equity:

    (a)    The rights and remedies provided for by California Civil Code 
Section 1951.2, including but not limited to, recovery of the worth at 
the time of award of the amount by which the unpaid rent for the 
balance of the term after the time of award exceeds the amount of 
rental loss for the same period that Tenant proves could be reasonably 
avoided, as computed pursuant to subsection (b) of said Section 
1951.2.  Any proof by Tenant under subparagraph (2) and (3) of Section 
1951.2 of the California Civil Code of the amount of rental loss that 
could be reasonably avoided shall be made in the following manner:  
Landlord and Tenant shall each select a licensed real estate broker in 
the business of renting property of the same type and use as the 
Premises and in the same geographic vicinity.  Such two real estate 
brokers shall select a third licensed real estate broker, and the 
three licensed real estate brokers so selected shall determine the 
amount of the rental loss that could be reasonably avoided from the 
balance of the term of this Lease after the time of award.  The 
decision of the majority of said licensed real estate brokers shall be 
final and binding upon the parties hereto.

(b)    The rights and remedies provided by California Civil Code Section 
which allows Landlord to continue the Lease in effect and to enforce 
all of its rights and remedies under this Lease, including the right 
to recover rent as it becomes due, for so long as Landlord does not 
terminate Tenant's right to possession; acts of maintenance or 
preservation, efforts to relet the Premises, or the appointment of a 
receiver upon Landlord's initiative to protect its interest under this 
Lease shall not constitute a termination of Tenant's right to 
possession.

    (c)    The right to terminate this Lease by giving notice to Tenant in 
accordance with applicable law.
 
    (d)    To the extent permitted by law, the right and power to enter the 
Premises and remove therefrom all persons and property, to store such 
property in a public warehouse or elsewhere at the cost of and for the 
account of Tenant, and to sell such property and apply such proceeds 
therefrom pursuant to applicable California law, Landlord, may from 
time to time sublet the Premises or any part thereof for such term or 
terms (which may extend beyond the term of this Lease) and at such 
rent and such other terms as Landlord in its sole discretion, may deem 
advisable, with the right to make alterations and repairs to the 
Premises. Upon such subletting, (i) Tenant shall be immediately liable 
to pay Landlord, in addition to indebtedness other than rent due 
hereunder, the cost of such subletting, including, but not limited to 
reasonable attorneys' fees, and any real estate commissions actually 
paid, and the cost of such alterations and repairs incurred by 
Landlord and the amount, if any, by which the rent hereunder for the 
period of such subletting (to the extent such period does not exceed 
the term hereof) exceeds the amount to be paid as rent for the 
Premises for such period or (ii)at the option of Landlord, rents 
received from such subletting shall be applied first to payment of 
indebtedness other than rent due hereunder from Tenant to Landlord; 
second, to the payment of any costs of such subletting and of such 
alterations and repairs; third to payment of rent due and unpaid 
hereunder; and the residue, if any, shall be held by Landlord and 
applied in payment of future rent as the same becomes due hereunder. 
If Tenant has been credited with any rent to be received by such 
subletting under option (i) and such rent shall not be promptly paid 
to Landlord by the subtenant(s), or if such rentals received from such 
subletting under option (ii) during any month be less than that to be 
paid during that month by Tenant hereunder. Tenant shall pay any such 
deficiency to Landlord. Such deficiency shall be calculated and paid 
monthly. No taking possession of the Premises by Landlord shall be 
construed as an election on its part to terminate this Lease unless a 
written notice of such

<PAGE>

intention be given to Tenant. Notwithstanding 
any such subletting without termination. Landlord may at any time 
hereafter elect to terminate this Lease for such previous breach.

    (e)    The right to have a receiver appointed for Tenant upon application 
by Landlord, to take possession of the Premises and to apply any 
rental collected from the Premises and to exercise all other rights 
and remedies granted to Landlord pursuant to subparagraph d. above 
(except that Tenant may vacate so long as it pays rent, provides an 
on-site security guard during normal business hours from Monday 
through Friday, and otherwise performs its obligations hereunder).

23. ABANDONMENT  Tenant shall not vacate or abandon the Premises at any time 
during the term of this Lease (except that Tenant may vacate so long as it 
pays rent, provides an on-site security guard during normal business hours 
from Monday through Friday, and otherwise performs its obligations hereunder) 
and if Tenant shall abandon, vacate or surrender said Premises, or be 
dispossessed by the process of law, or otherwise, any personal property 
belonging to Tenant and left on the Premises shall be deemed to be abandoned, 
at the option of Landlord, except such property as may be mortgaged to 
Landlord.

24. DESTRUCTION  In the event the Premises are destroyed in whole or in part  
from any cause, except for routine maintenance and repairs and incidental 
damage and destruction caused from vandalism and accidents for which Tenant is 
responsible for under Paragraph 10. Landlord may, as its option:
(a)    Rebuild or restore the Premises to their condition prior to the 
damage or 
        destruction, or
(b)    Terminate this Lease, (providing that the Premises is damaged to the 
extent of 33 1/3% of the replacement cost).

If Landlord does not give Tenant notice in writing within thirty (30) days 
from the destruction of the Premises of its election to either rebuild and 
restore them, or to terminate this Lease, Landlord shall be deemed to have 
elected to rebuild or restore them, in which event Landlord agrees, at its 
expense, promptly to rebuild or restore the Premises to their condition prior 
to the damage or destruction.  Tenant shall be entitled to a reduction in rent 
while such repair is being made in the proportion that the area of the 
Premises rendered untenantable by such damage bears to the total area of the 
Premise. If Landlord initially estimates that the rebuilding or restoration 
will exceed 180 days or if Landlord does not complete the rebuilding or 
restoration within one hundred eighty (180) days following the date of 
destruction (such period of time to be extended for delays caused by the fault 
or neglect of Tenant or because of Acts of God, acts of public agencies, labor 
disputes, strikes, fires, freight embargoes, rainy or stormy weather, 
inability to obtain materials, supplies or fuels, acts of contractors or 
subcontractors, or delay of the contractors or subcontractors due to such 
causes or other contingencies beyond the control of Landlord), then Tenant 
shall have the right to terminate this Lease by giving fifteen (15) days prior 
written notice to Landlord. Notwithstanding anything herein to the contrary, 
Landlord's obligation to rebuild or restore shall be limited to the building 
and interior improvements constructed by Landlord as they existed as of the 
commencement date of the Lease and shall not include restoration of Tenant's 
trade fixtures, equipment, merchandise, or any improvements, alterations or 
additions made by Tenant to the Premises, which Tenant shall forthwith replace 
or fully repair at Tenant's sole cost and expense provided this Lease is not 
canceled according to the provisions above.

Unless this Lease is terminated pursuant to the foregoing provisions,  this 
Lease shall remain in full force and effect. Tenant hereby expressly waives 
the provisions of Section 1932. Subdivision 2. in Section 1933. Subdivision 4 
of the California Civil Code.

In the event that the building in which the Premises are situated is damaged 
or destroyed to the extent of not less than 33 1/3% of the replacement cost 
thereof. Landlord may elect to terminate this Lease, whether the Premises be 
injured or not.  Notwithstanding anything to the contrary herein, Landlord may 
terminate this Lease in the event of an uninsured event or if insurance 
proceeds are insufficient to cover one hundred percent of the rebuilding costs 
net of the deductible.  See Paragraph 56.

25.  EMINENT DOMAIN  If all or any part of the Premises shall be taken by any 
public or quasi-public authority under the power of eminent domain or 
conveyance in lieu thereof, this Lease shall terminate as to any portion of 
the Premises so taken or conveyed on the date when title vests in the 
condemnor, and Landlord shall be entitled to any and all payment, income, 
rent, award, or any interest therein whatsoever which may be paid or made in 
connection with such taking or conveyance, and Tenant shall have no claim 
against Landlord or otherwise for the value of any unexpired term of this 
Lease. Notwithstanding the foregoing paragraph, any compensation specifically 
awarded Tenant for loss of business.

Tenant's personal property, moving cost or loss of goodwill, shall be and 
remain the property of Tenant.

If (i) any action or proceeding is commenced for such taking of the Premises 
or any part thereof, or if Landlord is advised in writing by any entity or 
body having the right or power of condemnation of its intention to condemn the 
premises or any portion thereof, or (ii) any of the foregoing events occur 
with respect to the taking of any space in the Complex not leased hereby, or 
if any such spaces so taken or conveyed in lieu of such taking and Landlord 
shall decide to discontinue the use and operation of the Complex, or decide to 
demolish, alter or rebuild the Complex, then, in any of such events Landlord 
shall have the right to terminate this Lease by giving Tenant written notice 
thereof within sixty (60) days of the date of receipt of said written advice, 
or commencement of said action or proceeding, or taking conveyance, which 
termination shall take place as of the first to occur of the last day of the 
calendar month next following the month in which such notice is given or the 
date on which title to the Premises shall vest in the condemnor.

In the event of such a partial taking or conveyance of the Premises, if  the 
portion of the Premises taken or conveyed is so substantial that the Tenant  
can no longer reasonably conduct its business, Tenant shall have the privilege  
of terminating this Lease within sixty (60) days from the date of such taking 
or conveyance, upon written notice to Landlord of its intention so to do, and 
upon giving of such notice this Lease shall terminate on the last day of the 
calendar month next following the month in which such notice is given, upon 
payment by Tenant of the rent from the date of such taking or conveyance to 
the date of termination.

If a portion of the Premises be taken by condemnation or conveyance in lieu 
thereof and neither Landlord nor Tenant shall terminate this Lease as provided 
herein, this Lease shall continue in full force and effect as to the part of 
the Premises not so taken or conveyed, and the rent herein shall be 
apportioned as of the date of such taking or conveyance so that thereafter the 
rent to be paid by Tenant shall be in the ratio that the area of the portion 
of the Premises not so taken or conveyed bears to the total area of the 
Premises prior to such taking.

26.  SALE OR CONVEYANCE BY LANDLORD  In the event of a sale or conveyance of 
the Complex or any interest therein, by any owner of the reversion then 
constituting Landlord, the transferor shall thereby be released from any 
further liability upon any of the terms, covenants or conditions (express or 
implied) herein contained in favor of Tenant provided that the transferee 
assumes in writing all obligations hereunder, and in such event, insofar as 
such transfer is concerned, Tenant agrees to look solely to the responsibility 
of the successor in interest of such transferor in and to the Complex and this 
Lease. This Lease shall not be affected by any such sale or conveyance, and 
Tenant agrees to attorn to the successor in interest of such transferor.

27.  ATTORNMENT TO LENDER OR THIRD PARTY  In the event the interest of 
Landlord in the land and buildings in which the leased Premises are located 
(whether such interest of Landlord is a fee title interest or a leasehold 
interest) is encumbered by deed of trust, and such interest is acquired by the 
lender or any third party through judicial foreclosure or by exercise of power 
of sale at private trustee's foreclosure sale. Tenant hereby agrees to attorn 
to the purchaser at any such foreclosure sale and to recognize such purchaser 
as the Landlord under this Lease. In the event the lien of the deed of trust 
securing the loan from a Lender to Landlord is prior and paramount to Lease, 
this Lease shall nonetheless continue in full force and effect for the 
remainder of the unexpired term hereof, at the same rental herein reserved and 
upon all the other
terms, conditions and covenants herein contained.


28.  HOLDING OVER  Any holding over by Tenant after expiration or other  
termination of the term of this Lease with the written consent of Landlord 
delivered to Tenant shall not constitute a renewal or extension of the Lease 
or give Tenant any rights in or to the leased Premises (except as expressly 
provided in this Lease. Any holding over after the expiration or other 
termination of the term of this Lease, with the consent of Landlord, shall be 
construed to be a tenancy from month to month, on the same terms and 
conditions herein specified insofar as applicable except that the monthly 
Basic Rent shall be increased to an amount equal to one hundred fifty (150%) 
percent of the monthly Basic Rent required during the last month of the Lease 
term.

29.  CERTIFICATE OF ESTOPPEL  Tenant shall at any time upon not less than ten 
(10) days' prior written notice to Landlord execute, acknowledge and deliver 
to Landlord a statement in writing (i) certifying that this Lease is 
unmodified and in full force and effect for, if modified, stating the nature 
of such modification and certifying that this Lease, as so modified, is in 
full force and effect and the date to which the rent and other charges are 
paid in advance, if any, and (ii) acknowledging that there are not, to 
Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or 
specifying such defaults, if any, are claimed. Any such statement may be 
conclusively relied upon by any prospective purchaser or encumbrancer of the 
Premises. Tenant's failure to deliver such statement within such time shall be 
conclusive upon Tenant that this Lease is in full force and effect, without 
modification except as may be represented by Landlord, that there are no 
uncured defaults in Landlord's performance, and that not more than one month's 
rent has been paid in advance.

30.  CONSTRUCTION CHANGES  It is understood that the description of the 
Premises and the location of ductwork, plumbing and other facilities therein 
are subject to such minor changes as Landlord or Landlord's architect 
determines to be desirable in the course of construction of the Premises, and 
no such changes, or any changes in plans for any other portions of the Complex 
shall affect this Lease or entitle Tenant to any reduction of rent hereunder 
or result in any liability of Landlord to Tenant. Landlord does not Guarantee 
the accuracy of any drawings supplied to Tenant and verification of the 
accuracy of such drawings rests with Tenant.

31.  RIGHT OF LANDLORD TO PERFORM  All items, covenants and conditions of this 
Lease to be performed or observed by Tenant shall be performed or observed by 
Tenant at Tenant's sole cost and expense and without any reduction of rent. If 
Tenant shall fail to pay any sum of money, or other rent, required to be paid 
by it hereunder and such failure shall continue for five (5) days after 
written notice thereof by Landlord, or shall fail to perform any other term or 
covenant hereunder on its part to be performed, and such failure shall 
continue for thirty (30) days after written notice thereof by Landlord, 
Landlord, without waiving or releasing Tenant from any obligation of Tenant 
hereunder, may, but shall not be obligated to, make any such payment or 
perform

<PAGE>

 any such other term or covenant on Tenant's part to be performed. All 
sums so paid by Landlord and all necessary costs of such performance by 
Landlord together with interest thereon at the rate of the prime rate of 
interest per annum as quoted by the Bank of America from the date of such 
payment or performance by Landlord, shall be paid (and Tenant covenants to 
make such payment) to Landlord on demand by Landlord, and Landlord shall have 
(in addition to any other right or remedy of Landlord) the same rights and 
remedies in the event of nonpayment by Tenant as in the case of failure by 
Tenant in the payment of rent hereunder.

32. ATTORNEYS' FEES.
(A)  In the event that either Landlord or Tenant should bring suit for the 
possession of the Premises, for the recovery of any sum due under this 
Lease, or because of the breach of any provision of this Lease, or for any 
other relied against the other party hereunder, then all costs and 
expenses, including reasonable attorneys' fees, incurred by the prevailing 
party therein shall be paid by the other party, which obligation on the 
part of the other party shall be deemed to have accrued on the date of the 
commencement of such action and shall be enforceable whether or not the 
action is prosecuted to judgment.
(B)  Should Landlord be named as a defendant in any suit brought against 
Tenant in connection with or arising out of Tenant's occupancy hereunder, 
Tenant shall pay to Landlord its costs and expenses incurred in such suit, 
including a reasonable attorney's fee.

33. WAIVER The waiver by either party of the other party's failure to perform 
or observe any term, covenant or condition herein contained to be performed or 
observed by such waiving party shall not be deemed to be a waiver of such 
item, covenant or condition or any subsequent failure of the party failing to 
perform or observe the same or any other such term, covenant or condition 
therein contained, and no custom or practice which may develop between the 
parties hereto during the term hereof shall be deemed a waiver of, or in any 
way affect, the right of either party to insist upon performance and 
observance by the other party in strict accordance with the terms hereof.

34.  NOTICES  All notices, demands, requests, advices or designations which may 
be or are required to be given by either party to the other hereunder shall be 
in writing. All notices, demands, requests, advices or designations by 
Landlord to Tenant shall be sufficiently given, made or delivered if 
personally served on Tenant by leaving the same at the Premises or if sent by 
United States certified or registered mail, postage prepaid, addressed to 
Tenant at the Premises. All notices, demands, requests, advices or 
designations by Tenant to Landlord shall be sent by United States certified or 
registered mail, postage prepaid, addressed to Landlord at its offices at A&P 
Family Investments, c/o Peery/Arrillaga, 2560 Mission College Blvd., #101, 
Santa Clara, CA, 95054.  Each notice, request, demand, advice or designation 
referred to in this paragraph shall be deemed received on the date of the 
personal service or mailing thereof in the manner herein provided, as the case 
may be. 

35. EXAMINATION OF LEASE  Submission of this instrument for examination or 
signature by Tenant does not constitute a reservation of or option for a 
lease, and this instrument is not effective as a lease or otherwise until its 
execution and delivery by both Landlord and Tenant.

36. DEFAULT BY LANDLORD  Landlord shall not be in default unless Landlord 
fails  to perform obligations required of Landlord within a reasonable time, 
but in no event earlier than thirty (30) days after written notice by Tenant 
to Landlord and to the holder of any first mortgage or deed of trust covering 
the Premises whose name and address shall have heretofore been furnished to 
Tenant in writing, specifying wherein Landlord has failed to perform such 
obligations; provided, however, that if the nature of Landlord's obligations 
is such that more than thirty (30) days are required for performance, then 
Landlord shall not be in default if Landlord commences performance within such 
thirty (30) day period and thereafter diligently prosecutes the same to 
completion.

37. CORPORATE AUTHORITY  If Tenant is a corporation, for a partnership each 
individual executing this Lease on behalf of said corporation (or partnership) 
represents and warrants that he is duly authorized to execute and deliver this 
Lease on behalf of said corporation (for partnership) in accordance with the 
by-laws of said corporation for partnership in accordance with the partnership 
agreement) and that this Lease is binding upon said corporation for 
partnership) in accordance with its terms.  If Tenant is a corporation, Tenant 
shall, within thirty (30) days after execution of this Lease, deliver to 
Landlord a certified copy of the resolution of the Board of Directors of said 
corporation authorizing or ratifying the execution of this Lease.

38.  Deleted
39.  LIMITATION OF LIABILITY  In consideration of the benefits accruing 
hereunder, Tenant and all successors and assigns covenant and agree that, in 
the event of any actual or alleged failure, breach or default hereunder by 
Landlord:

    (i)    the sole and exclusive remedy shall be against Landlord's interest 
in the Premises leased herein;

(ii)    no partner of Landlord shall be sued or named as a party in any 
suit or action (except as may be necessary to secure jurisdiction of 
the partnership);

(iii)    no service of process shall be made against any partner of 
Landlord (except as may be necessary to secure jurisdiction of the 
partnership);

(iv)    no partner of Landlord shall be required to answer or otherwise  
plead to any service of process;

(v)    no judgment will be taken against any partner of Landlord;

(vi)    any judgment taken against any partner of Landlord may be vacated 
and set aside at any time without hearing;

(vii)     no writ of execution will ever be levied against the assets of 
any partner of Landlord;

(viii)    these covenants and agreements are enforceable both by Landlord 
and also by any partner of Landlord.

Tenant agrees that each of the foregoing covenants and agreements shall be 
applicable to any covenant or agreement either expressly contained in this 
Lease or imposed by statute or at common law.

40. MISCELLANEOUS AND GENERAL PROVISIONS

a.    Tenant shall not, without the written consent of Landlord, use the 
name of the building for any purpose other than as the address of the 
business conducted by Tenant in the Premises.

b.    This Lease shall in all respects be governed by and construed in 
accordance with the laws of the State of California. If any provision 
of the Lease shall be invalid, unenforceable or ineffective for any 
reason whatsoever, all other provisions hereof shall be and remain in 
full force and effect.

c.    The term "Premises" includes the space leased hereby and any 
improvements now or hereafter installed therein or attached thereto. 
The term "Landlord" or any pronoun used in place thereof includes the 
plural as well as the singular and the successors and assigns of 
Landlord. The term "Tenant" or any pronoun used in place thereof 
includes the plural as well as the singular and individuals, firms, 
associations, partnerships and corporations, and their and each of 
their respective heirs, executors, administrators, successors and 
permitted assigns, according to the context hereof, and the provisions 
of this Lease shall inure to the benefit of and bind such heirs, 
executors, administrators, successors and permitted assigns.

The term "person" includes the plural as well as the singular and 
individuals, firms, associations, partnerships and corporations. Words 
used  in any gender include other genders. If there be more than on 
Tenant the obligations of Tenant hereunder are joint and several. The 
paragraph headings of this Lease are for convenience of reference only 
and shall have no effect upon the construction or interpretation of 
any provision hereof.

d.    Time is of the essence of this Lease and of each and all of its 
provisions.

<PAGE>

e.    At the expiration or earlier termination of this Lease, Tenant shall 
execute, acknowledge and deliver to Landlord, within ten (10) days 
after written demand from Landlord to Tenant, any quitclaim deed or 
other document required by any reputable title company, licensed to 
operate in the State of California, to remove the cloud or encumbrance 
created by this Lease from the real property of which Tenant's 
Premises are a part.

f.    This instrument along with any exhibits and attachments hereto 
constitutes the entire agreement between Landlord and Tenant relative 
to the Premises and this agreement and the exhibits and attachments 
may be altered, amended or revoked only by an instrument in writing 
signed by both Landlord and Tenant. Landlord and Tenant agree hereby 
that all prior or contemporaneous oral agreements between and among 
themselves and their agents or representatives relative to the leasing 
of the Premises are merged in or revoked by this agreement.

g.    Neither Landlord nor Tenant shall record this Lease or a short form 
memorandum hereof without the consent of the other.

h.    Tenant further agrees to execute any amendments required by a lender 
to enable Landlord to obtain financing, so long as Tenant's rights 
hereunder are not substantially affected.

i.    Paragraphs 42 through 55 are added hereto and are included as a part 
of this lease.

j.    Clauses, plats and riders, if any, signed by Landlord and Tenant and 
endorsed on or affixed to this Lease are a part hereof.

k.    Tenant covenants and agrees that no diminution or shutting off of 
light, air or view by any structure which may be hereafter erected 
(whether or not by Landlord) shall in any way affect his Lease, 
entitle Tenant to any reduction of rent hereunder or result in any 
liability of Landlord to Tenant.

41.  BROKERS  Tenant warrants that it had dealings with only the following 
real estate brokers or agents in connection with the negotiation of this 
Lease: none and that it knows of no other real estate broker or agent who is 
entitled to a commission in connection with this Lease.

42.  SIGNS  No sign, placard, picture, advertisement, name or notice shall be 
inscribed, displayed or printed or affixed on or to any part of the outside of 
the Premises or any exterior windows of the Premises without the written 
consent of Landlord first had and obtained and Landlord shall have the right 
to remove any such sign, placard, picture, advertisement, name or notice 
without notice to and at the expense of Tenant. If Tenant is allowed to print 
or affix or in any way place a sign in, on, or about the Premises, upon 
expiration or other sooner termination of this Lease. Tenant at Tenant's sole 
cost and expense shall both remove such sign and repair all damage in such a 
manner as to restore all aspects of the appearance of the Premises to the 
condition prior to the placement of said sign.

All approved signs or lettering on outside doors shall be printed, painted, 
affixed or inscribed at the expense of Tenant by a person approved of by 
Landlord.

Tenant shall not place anything or allow anything to be placed near the glass 
of any window, door partition or wall which may appear unsightly from outside 
the Premises.

   IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this  
Lease as of the day and year last written below.


LANDLORD:                                    TENANT:
     
RICHARD T. PEERY 1976 CHILDREN TRUSTS        NEOMAGIC CORPORATION,
                                             a California corporation



By  /s/ Boyd C. Smith                     By  /s/ Ibrahim Korgav
   -----------------------------------      ------------------------------
   Boyd C. Smith, Trustee                 Title VP, Manufacturing Operations  
                         
Dated:    October 31, 1997                Date:   October 22, 1997            
                                   
JOHN ARRILLAGA 1976 CHILDREN TRUSTS

By  /s/ Louis B. Sullivan
   -----------------------------------
    Louis B. Sullivan, Trustee

Dated:  October 31, 1997

<PAGE>

Paragraphs 43 through 56 to Lease Agreement Dated October 9, 1997, By and 
Between the John Arrillaga 1976 Children Trusts and Richard T. Peery 1976 
Children Trusts (d.b.a. A&P Family Investments), as Landlord, and NeoMagic 
Corporation, a California corporation, as Tenant for 45,000+- Square Feet of 
Space Located at 3250 Jay Street, Santa Clara, California.

43.  BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate
sum of FIVE MILLION SIX HUNDRED FORTY THREE THOUSAND AND
NO/l00 DOLLARS ($5,643,000.00), shall be payable as follows:

     On January 1, 1998, the sum of EIGHTY THREE THOUSAND TWO HUNDRED FIFTY 
AND NO/100 DOLLARS ($83,250.00) shall be due, and a like sum due on the first 
day of each month thereafter, through and including December 1, 1998.

     On January 1, 1999, the sum of EIGHTY FIVE THOUSAND FIVE HUNDRED AND
NO/100 DOLLARS ($85,500.00) shall be due, and a like sum due on the first day 
of
each month thereafter, through and including December 1, 1999.

     On January 1, 2000, the sum of EIGHTY SEVEN THOUSAND SEVEN HUNDRED FIFTY 
AND NO/l00 DOLLARS ($87,750.00) shall be due, and a like sum due on the
first day of each month thereafter, through and including December 1, 2000.

     On January 1, 2001, the sum of NINETY THOUSAND AND NO/100 DOLLARS 
($90,000.00) shall be due, and a like sum due on the first day of each month 
thereafter, through and including December 1, 2001.

     On January 1, 2002, the sum of NINETY TWO THOUSAND TWO HUNDRED FIFTY AND 
NO /l00 DOLLARS ($92,250.00) shall be due, and a like sum due on the first day 
of each month thereafter, through and including December 1, 2002.

     On January 1, 2003, the sum of NINETY FOUR THOUSAND FIVE HUNDRED AND 
NO/100 DOLLARS ($94,500.00) shall be due, and a like sum due on the first day 
of each month thereafter, through and including April 1, 2003; or until the 
entire aggregate sum of FIVE MILLION SIX HUNDRED FORTY THREE THOUSAND AND 
NO/100 DOLLARS ($5,643,000.00) has been paid.

44.  "AS-IS" BASIS: It is hereby agreed that the Premises leased hereunder is 
leased strictly on an "as-is" basis and in its present condition, and in the 
configuration as shown on Exhibit B to be attached hereto, and by reference 
made a part hereof. It is specifically agreed between the parties that 
Landlord shall not be required to make, nor be responsible for any cost, in 
connection with any repair, restoration, and/or improvement to the Premises in 
order for this Lease to commence, or thereafter, throughout the Term of this 
Lease.  Landlord makes no warranty or representation of any kind or nature 
whatsoever as to the condition or repair of the Premises, nor as to the use or 
occupancy which may be made thereof.

45. CONSENT: Whenever the consent of one party to the other is required
hereunder, such consent shall not be unreasonably withheld.

46.  CHOICE OF LAW; SEVERABILITY.  This Lease shall in all respects be 
governed by and construed in accordance with the laws of the State of 
California. If any provisions of this Lease shall be invalid, unenforceable, 
or ineffective for any reason whatsoever, all other provisions hereof shall be 
and remain in full force and effect.

47.  AUTHORITY TO EXECUTE.  The parties executing this lease Agreement hereby 
warrant and represent that they are properly authorized to execute this Lease 
Agreement and bind the parties on behalf of whom they execute this Lease 
Agreement and to all of the terms, covenants and conditions of this Lease 
Agreement as they relate to the respective parties hereto.

<PAGE>

48 ASSESSMENT CREDITS: The demised property herein may be subject to a special 
assessment levied by the City of Santa Clara as part of an Improvement 
District. As a part of said special assessment proceedings (if any), 
additional bonds were or may be sold and assessments were or may be levied to 
provide for construction contingencies and reserve funds. Interest shall be 
earned on such funds created for contingencies and on reserve funds which will 
be credited for the benefit of said assessment district. To the extent 
surpluses are created in said district through unused contingency funds, 
interest earnings or reserve funds, such surpluses shall be deemed the 
property of Landlord. Notwithstanding that such surpluses may be credited on 
assessments otherwise due against the Leased Premises, Tenant shall pay to 
Landlord, as additional rent if, and at the time of any such credit of 
surpluses, an amount equal to all such surpluses so credited.  For example: if 
(i) the property is subject to an annual assessment of $1,000.00, and (ii) a 
surplus of $200.00 is credited towards the current year's assessment which 
reduces the assessment amount shown on the property tax bill from $1,000.00 to 
$800.00, Tenant shall upon receipt of notice from Landlord, pay to Landlord 
said $200.00 credit as Additional Rent.
 
49.  ASSIGNMENT AND SUBLETTING (CONTINUED)  Any and all sublease agreement(s) 
between Tenant and any and all subtenant(s) (which agreements must be 
consented to by Landlord, pursuant to the requirements of this Lease) shall 
contain the following language:

    "If Landlord and Tenant jointly and voluntarily elect, for any reason 
whatsoever, to terminate the Master Lease prior to the scheduled Master Lease 
termination date, then this Sublease (if then still in effect) shall terminate 
concurrently with the termination of the Master Lease.  Subtenant expressly 
acknowledges and agrees that (1) the voluntary termination of the Master Lease 
by Landlord and Tenant and the resulting termination of this Sublease shall 
not give Subtenant any right or power to make any legal or equitable claim 
against Landlord, including without limitation any claim for interference with 
contract or interference with prospective economic advantage, and (2) 
Subtenant hereby waives any and all rights it may have under law or at equity 
against Landlord to challenge such an early termination of the Sublease, and 
unconditionally releases and relieves Landlord, and its officers, directors, 
employees and agents, from any and all claims, demands, and/or causes of 
action whatsoever (collectively, "Claims"), whether such matters are known or 
unknown, latent or apparent, suspected or unsuspected, foreseeable or 
unforeseeable, which Subtenant may have arising out of or in connection with 
any such early termination of this Sublease.  Subtenant knowingly and 
intentionally waives any and all protection which is or may be given by 
Section 1542 of the California Civil Code which provides as follows:  "A 
general release does not extend to claims which the creditor does not know or 
suspect to exist in his favor at the time of executing the release, which if 
known by him must have materially affected his settlement with debtor.

    The term of this Sublease is therefore subject to early termination.  
Subtenant's initials here below evidence (a) Subtenant's consideration of and 
agreement to this early termination provision, (b) Subtenant's acknowledgment 
that, in determining the net benefits to be derived by Subtenant under the 
terms of this Sublease, Subtenant has anticipated the potential for early 
termination, and (c) Subtenant's agreement to the general waiver and release 
of Claims above.

    Initials: ___________    Initials: __________
               Subtenant                Tenant

50.   BANKRUPTCY AND DEFAULT.  Paragraph 22 is modified to provide that with 
respect to non-monetary defaults not involving Tenant's failure to pay Basic 
Rent or Additional Rent, Tenant shall not be in default of any non-monetary 
obligation if (i) more than thirty (30) days is required to cure such non-
monetary default, and (ii) Tenant commences cure of such default as soon as 
reasonably practicable after receiving written notice of such default from 
Landlord and thereafter continuously and with due diligence prosecutes such 
cure to completion.

51.  ABANDONMENT:  Paragraph 23 is modified to provide that Tenant shall not be 
in default under the Lease if it leaves all or any part of Premises vacant so 
long as (i) Tenant is performing all of its other obligations under the Lease 
including the obligation to pay Basic Rent and Additional Rent (ii) Tenant 
provides on-site security during normal business hours for those parts of the 
Premises left vacant, (iii) such vacancy does not materially and adversely 
affect the

<PAGE>

 validity or coverage of any policy of insurance carried by Landlord 
with respect to the Premises, and (iv) the utilities and heating and 
ventilation system are operated and maintained to the extent necessary to 
prevent damage to the Premises or its systems.

52. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to 
the existence or use of "Hazardous Materials" (as defined herein) on, in, 
under or about the Premises and real property located beneath said Premises 
and the common areas of the Complex (hereinafter collectively referred to as 
the "Property"):

A.  As used herein, the term "Hazardous Materials" shall mean any 
material, waste, chemical, mixture or byproduct which is or hereafter is 
defined, listed, or designated under Environmental Laws (defined below) as a 
pollutant, or as a contaminant, or as a toxic or hazardous substance, waste or 
material, or any other unwholesome, hazardous toxic, biohazardous, or 
radioactive material, waste, chemical, mixture or byproduct, or which is 
listed, regulated or restricted by any Environmental Law (including, without 
limitation, petroleum hydrocarbons or any distillates or derivatives or 
fractions thereof, polychlorinated biphenyls, or asbestos).  As used herein, 
the term "Environmental Laws" shall mean any applicable Federal, State of 
California or local government law (including common law), statute, 
regulation, rule, ordinance, permit, license, order, requirement, agreement, 
or approval, or any determination, judgment, directive, or order of any 
executive or judicial authority at any level of Federal, State of California 
or local government (whether now existing or subsequently adopted or 
promulgated) relating to pollution or the protection of the environment, 
ecology, natural resources, or public health and safety.

B.  Tenant shall obtain Landlord's written consent, which may be withheld in 
Landlord's discretion, prior to the occurrence of any Tenant's Hazardous 
Material Activities (defined below); provided, however, that Landlord's 
consent shall not be required for normal use in compliance with applicable 
Environmental Laws of customary household and office supplies (Tenant shall 
first provide Landlord with a list of said materials use), such as mild 
cleaners, lubricants and copier toner.  As used herein, the term "Tenant's 
Hazardous Materials Activities" shall mean any and all use, handling, 
generation, storage, disposal, treatment, transportation, release, discharge, 
or emission of any Hazardous Materials on, in , beneath, to, from, at or about 
the Property, in connection with Tenant's use of the Property, or by Tenant or 
by any of Tenant's agents, employees, contractors, vendors, invitees, visitors 
or its future subtenants or assignees.  Tenant agrees that any and all 
Tenant's Hazardous Materials Activities shall be conducted in strict, full 
compliance with applicable Environmental Laws at Tenant's expense, and shall 
not result in any contamination of the Property or the environment.  Tenant 
agrees to provide Landlord with prompt written notice of any spill or release 
of Hazardous Materials at the Property during the term of the Lease of which 
Tenant becomes aware, and further agrees to provide Landlord with prompt 
written notice of any violation of Environmental Laws in connection with 
Tenant's Hazardous Materials Activities of which Tenant becomes aware.  If 
Tenant's Hazardous Materials Activities involve Hazardous Materials other than 
normal use of customary household and office supplies, Tenant also agrees at 
Tenant's expense: (i) to install such Hazardous Materials monitoring, storage 
and containment devices as Landlord reasonably deems necessary (Landlord shall 
have no obligation to evaluate the need for any such installation or to 
require any such installation); (ii) provide Landlord with a written inventory 
of such Hazardous Materials, including an update of same each year upon the 
anniversary date of the Commencement Date of the Lease ("Anniversary Date"); 
and (iii) on each Anniversary Date, to retain a qualified environmental 
consultant, acceptable to Landlord, to evaluate whether Tenant is in 
compliance with all applicable Environmental Laws with respect to Tenant's 
Hazardous Materials Activities.  Tenant, at its expense, shall submit to 
Landlord a report from such environmental consultant which discusses the 
environmental consultant's findings within two (2) months of each Anniversary 
Date.  Tenant, at its expense, shall promptly undertake and complete any and 
all steps necessary, and in full compliance with applicable Environmental 
Laws, to fully correct any and all problems or deficiencies identified by the 
environmental consultant, and promptly provide Landlord with documentation of 
all such corrections.
C.  Prior to termination or expiration of the Lease, Tenant, at its expense, 
shall (i) properly remove from the Property all Hazardous Materials which come 
to be located at the Property in connection with Tenant's Hazardous Materials 
Activities, and (ii) fully comply with and complete all facility closure 
requirements of applicable Environmental Laws regarding Tenant's Hazardous 
Materials Activities, including but not limited to (x) properly restoring and 
repairing the Property to the extent damaged by such closure activities, and 
(y) obtaining from the local Fire Department or other appropriate governmental 
authority with jurisdiction a written

<PAGE>

 concurrence that closure has been 
completed in compliance with applicable Environmental Laws.  Tenant shall 
promptly provide Landlord with copies of any claims, notices, work plans, data 
and reports prepared, received  or submitted in connection with any such 
closure activities.
D.  If Landlord, in its sole discretion, believes that the Property has become 
contaminated as a result of Tenant's Hazardous Materials Activities, Landlord 
in addition to any other rights it may have under this Lease or under 
Environmental Laws or other laws, may enter upon the Property and conduct 
inspection, sampling and analysis, including but not limited to obtaining and 
analyzing samples of soil and groundwater, for the purpose of determining the 
nature and extent of such contamination.  Tenant shall promptly reimburse 
Landlord for the costs of such an investigation, including but not limited to 
reasonable attorneys' fees Landlord incurs with respect to such investigation, 
that discloses Hazardous Materials contamination for which Tenant is liable 
under this Lease.  Except as may be required of Tenant by applicable 
Environmental Laws, Tenant shall not perform any sampling, testing, or 
drilling to identify the presence of any Hazardous Materials at the Property, 
without Landlord's prior written consent which may be withheld in Landlord's 
discretion.  Tenant shall promptly provide Landlord with copies of any claims, 
notices, work plans, data and reports prepared, received or submitted in 
connection with any sampling, testing or drilling performed pursuant to the 
preceding sentence.
E.  Tenant shall indemnify, defend (with legal counsel acceptable to Landlord, 
whose consent shall not unreasonably be withheld) and hold harmless Landlord, 
its employees, assigns, successors, successors-in-interest, agents and 
representatives from and against any and all claims (including but not limited 
to third party claims from a private party or a government authority), 
liabilities, obligations, losses, causes of action, demands, governmental 
proceedings or directives, fines, penalties, expenses, costs (including but 
not limited to reasonable attorneys', consultants' and other experts' fees and 
costs), and damages, which arise from or relate to:  (i) Tenant's Hazardous 
Materials Activities; (ii) any Hazardous Materials contamination caused  by 
Tenant prior to the Commencement Date of the Lease; or (iii) the breach of any 
obligation of Tenant under this Paragraph 52 (collectively, "Tenant's 
Environmental Indemnification").  Tenant's Environmental Indemnification shall 
include but is not limited to the obligation to promptly and fully reimburse 
Landlord for losses in or reductions to rental income, and diminution in fair 
market value of the Property.  Tenant's Environmental Indemnification shall 
further include but is not limited to the obligation to diligently and 
properly implement to completion, at Tenant's expense, any and all 
environmental investigation, removal, remediation, monitoring, reporting, 
closure activities, or other environmental response action (collectively, 
"Response Actions").  Tenant shall promptly provide Landlord with copies of 
any claims, notices, work plans, data and reports prepared, received or 
submitted in connection with any Response Actions.
It is agreed that the Tenant's responsibilities related to Hazardous Materials 
will survive the expiration or termination of this Lease and that Landlord may 
obtain specific performance of Tenant's responsibilities under this Paragraph 

53.  CROSS DEFAULT:  It is understood that Landlord and Tenant have previously 
entered into another lease dated February 5, 1996 for premises contiguous to 
the premises leased hereunder located at 3260 Jay Street, Santa Clara, 
California.  As a material part of the consideration for the execution of this 
Lease by landlord, it is agreed between Landlord and Tenant that a default 
under this Lease, or a default under said Existing Lease may, at the option of 
Landlord, be considered a default under both leases, in which event Landlord 
shall be entitled (but in no event required) to apply all rights and remedies 
of Landlord under the terms of one lease to both leases including, but not 
limited to, the right to terminate one or both of said leases by reason of a 
default under said Existing lease or hereunder.
54. LEASE TERMS CO-TERMINOUS: It is the intention of the parties that the Term 
of this Lease be co-terminous with the term of the Existing Lease such that 
the terms of both leases expire on the same date; provided, however, the 
termination of this Lease resulting from the terms and conditions stated under 
Paragraph 22 "Bankruptcy and Default" (subject to Landlord's option as stated 
in the respective leases' "Cross Default" Paragraph) or Paragraph 24 
"Destruction" or Paragraph 25 "Eminent Domain" shall not result in a 
termination of the Existing Lease, unless Landlord elects, at its sole and 
absolute discretion, to terminate both of the leases.

<PAGE>

55.LEASE CONTINGENT UPON LANDLORD OBTAINING TERMINATION AGREEMENT WITH CURRENT 
TENANT: This Lease is subject to and conditional upon Landlord obtaining from 
Basic Measuring Instruments ("BMI"), the current tenant occupying the Premises 
leased hereunder, a Termination Agreement satisfactory to Landlord on or 
before December 31, 1997. In the event Landlord is unable to obtain said 
satisfactory Termination Agreement on or before December 31, 1997, this Lease 
Agreement shall, at Landlord's option (a) be rescinded, or (b) the 
Commencement Date hereof shall be modified to reflect the date Landlord so 
obtains said satisfactory Termination Agreement and receives possession of the 
Premises hereunder free and clear of BMI's occupancy; provided, however, that 
said period of delay caused by BMI shall not extend beyond  February 28, 1998.  
In the event this Lease does not commence by March 1, 1998 (subject only to 
the delays covered in Paragraph 3) this Lease shall be automatically 
rescinded.

56.  DESTRUCTION CONT'D: Notwithstanding anything to the contrary in 
Paragraph 24 ("Destruction"), Tenant shall have the right to terminate this 
Lease if any damage to the  Premises occurs during the last year of the 
Term of this Lease and said damage cannot be repaired within six (6) 
months.  In the event Tenant elects to terminate this Lease, Tenant shall 
give written notice to Landlord of Tenant's election to terminate this 
Lease within five (5) days of Tenant's receipt of notice from Landlord 
identifying the projected time required to make the necessary repairs of 
said damage in which event this Lease would terminate thirty (30) days 
after Landlord receives written notice from Tenant of Tenant's election to 
terminate.  Tenant will remain responsible for the full performance of all 
terms, covenants and conditions here in contained through the effective 
date of termination.

<PAGE>

Exhibit 10.2
============

                             AMENDMENT NO 1
                               TO LEASE

    THIS AMENDMENT NO. 1 is made and entered into this 15th day of October 
1997, by and between BOYD C. SMITH, Trustee, or his Successor Trustee, UTA 
dated 12/22/77 (RICHARD T. PERRY 1976 CHILDREN TRUSTS) as amended, and LOUIS 
B. SULLIVAN, Trustee, or his Successor Trustee, UTA dated 12/26/77 (JOHN 
ARRILLAGA 1976 CHILDREN TRUSTS), as amended collectively as LANDLORD, and 
NEOMAGIC CORPORATION, a California Corporation, as TENANT.

                               RECITALS

A.  WHEREAS, by Lease Agreement dated February 5, 1996 Landlord leased to 
Tenant all of that certain 45,000 square foot building located at 3260 Jay 
Street, Santa Clara, California, the details of which are more particularly 
set forth in said February 5, 1996 Lease Agreement, and

B.  WHEREAS, said Lease was amended by the Commencement Letter dated May 7, 
1996which confirmed the May 1, 1996 Lease Commencement Date and the April 
30, 2003 Lease Termination Date, and,

C.  WHEREAS, it is now the desire of the parties hereto to amend the Lease by 
adding a co-terminous paragraph and a cross default paragraph in relation 
to a separate lease agreement dated October 9, 1997 between the parties 
hereto for said Lease Agreement as hereinafter set forth.

                               AGREEMENT

    NOW THEREFORE, for valuable consideration, receipt of which is hereby 
acknowledged, and in consideration of the hereinafter mutual promises, the 
parties hereto do agree as follows:

1.  LEASE TERMS CO-TERMINOUS:  It is acknowledged that (i) concurrently with 
the execution of this Amendment No. 1, Landlord and Tenant are also 
executing separate lease agreement dated October 9, 1997 (hereinafter 
referred to as the "1997 Lease") affecting adjacent property located at 
3250 Jay Street, Santa Clara and (ii) it is the intention of the parties 
that the term of this Lease be co-terminous with the term of the 1997 Lease 
such that the terms of both leases expire on the same date; provided, 
however, the termination of this Lease resulting from the terms and 
conditions stated under Paragraph 22 "Bankruptcy and Default" (subject to 
Landlord's option as stated in the respective leases' "Cross Default" 
Paragraph) or Paragraph 24 "Destruction" or Paragraph 25 "Eminent Domain" 
shall not result in a termination of the 1997 Lease, unless Landlord 
elects, at its sole and absolute discretion, to terminate both of the 
leases. 

2.  CROSS DEFAULT:  As a material part of the consideration for the execution 
of the 1997 Lease by Landlord, it is agreed between Landlord and Tenant, 
that a default under this Leases, or a default under said 1997 Lease may, 
at the option of Landlord, be considered a default under both leases, in 
which event Landlord shall be entitled (but in no event required) to apply 
all rights and remedies of Landlord under the terms of one lease to both 
leases including, but not limited to , the right to terminate one or both 
of said leases by reason of a default under said 1997 Lease or hereunder.

    EXCEPT AS MODIFIED HERIN, all other terms, covenants, and conditions of 
said February 5, 1996 Lease Agreement shall remain in full force and effect.

    IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment No. 1 
to Lease as of the day and year last written below.

LANDLORD:                    TENANT:

RICHARD T. PEERY 1976          NEOMAGIC CORPORATION
CHILDREN TRUSTS                a California Corporation

By /S/ Boyd C. Smith           By /S/ Ibrahim Korgav
   -----------------------      ---------------------
       Boyd C. Smith, Trustee   Ibrahim Korgav

Date: October 31, 1997         Title:  VP Manufacturing Operations

JOHN ARRILLAGA 1976 CHILDREN   Date:  October 22, 1997
TRUSTS

By /S/ Louis B. Sullivan
   -----------------------
   Louis B. Sullivan, Trustee

Date: October 31, 1997

<PAGE>

Exhibit 10.3 
============

                                 Exhibit A

                                CREDIT LINE

NMC and MIC agree with the credit line and credit line period from MIC to NMC 
as follows:  

    CREDIT LINE:        US$  18,000,000,000

    CREDIT LINE PERIOD:    from April 1, 1997 to January 31, 1998

The credit line after January 1998 shall be determined by the end of January 
1998 by mutual agreement between NMC and MIC.

Mitsubishi International Corp.        NeoMagic Corporation


/S/ JUNJI INOUE                      /S/ P.C. AGARWAL
-----------------------              -------------------------
By:  Junji Inoue                     By:  Prakash Agarwal
Title:  General Manager              Title:  President & CEO
Date:                                Date:    April 21, 1997

<PAGE>

EXHIBIT 11.1
============

        EXHIBIT 11.1 COMPUTATION OF PRO FORMA NET INCOME (LOSS) PER SHARE
                    (In thousands, except per share amounts)
                                   (Unaudited)

                                              Three Months      Nine Months   
                                            ----------------  ----------------
                                                  Ended             Ended     
                                            October  October  October  October
                                              31,      31,      31,      31,  
                                             1997     1996     1997     1996  
                                            ------   ------   ------   ------
Pro forma net income (loss) per share:

Weighted average shares outstanding         24,089    6,724   21,220    6,844

Common equivalent shares from common
stock, stock options and preferred
stock warrants granted or issued
during the twelve-month period prior
to the Company's initial public
offering related to Staff Accounting
Bulletin Topic 4D                                -    2,832        -    2,832

Dilutive common stock equivalents:
  Common stock options, using treasury
    stock method                             2,079      147    1,865        -
  Common stock warrants, using treasury
    stock method                               104      256      218        -
  Convertible preferred stock using
    the as-if converted method                   -        -    2,084        -
Adjustment to reflect the effect of 
  the retroactive conversion of 
  convertible preferred stock from 
  the date of issuance                           -   12,260        -   12,260
                                            ------   ------   ------   ------
Common and common equivalent shares 
  used in the calculation of pro forma
  net income (loss) per share               26,272   22,219   25,387   21,936
                                            ======   ======   ======   ======
Net income (loss)                           $6,545    $ 567  $12,595  $(2,203)
                                            ======   ======   ======   ======
Pro forma net income (loss) per share         $.25     $.03     $.50    $(.10)
                                            ======   ======   ======   ======
Pro forma fully diluted net income
  (loss) per share:

Weighted average shares outstanding         24,089    6,724   21,220    6,844

Common equivalent shares from common
  stock, stock  options and preferred
  stock warrants granted or issued 
  during the twelve-month period prior
  to the Company's initial public
  offering related to Staff Accounting
  Bulletin Topic 4D                              -    2,832        -    2,832

Dilutive common stock equivalents
  Common stock options, using treasury 
    stock method                             2,079      147    1,928        -
  Common stock warrants, using treasury 
    stock method                               104      256      221        -
  Convertible preferred stock using the 
    as-if converted method                       -        -    2,084        -
Adjustment to reflect the effect of the 
  retroactive conversion of convertible 
  preferred stock from the date of 
  issuance                                       -   12,260        -   12,260
                                            ------   ------   ------   ------
Common and common equivalent shares used 
in the calculation of net income (loss) 
per share                                   26,272   22,219   25,453   21,936
                                            ======   ======   ======   ======
Net income (loss)                           $6,545    $ 567  $12,595  $(2,203)
                                            ======   ======   ======   ======
Pro forma net income (loss) per share         $.25     $.03     $.50    $(.10)
                                            ======   ======   ======   ======
<PAGE>